MOTOR SICH JSC · power-generating sets. Motor Sich JSC manufac-tures gas-turbine drives with power of 2.5, 6.3, 8 MW, gas-turbine power-generating sets with out-put of 2.5, 6 MW

MOTOR SICH JSC

15, Motorostroiteley Ave.Zaporozhye, 69068, Ukraine

Tel.: (38 061) 720-48-14Fax: (38 061) 720-50-00Е-mail: [email protected]

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2012

CONTENTS

Address of the Chairman of the Boardof Directors of Motor Sich JSC . . . . . . . . . . . . . . 3

Basic Information about the Company . . . . . . . 4- Information about the Company . . . . . . . . . . . . . 6- Information about State Registration

of Motor Sich JSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6- Information about Statutory Capital. . . . . . . . . . . 6- Information about Auditor . . . . . . . . . . . . . . . . . . 7- Specialization of the Company . . . . . . . . . . . . . . . 7- Corporate Strategy of the Company. . . . . . . . . . . 7- Mission of the Company . . . . . . . . . . . . . . . . . . . . 7- Positioning of the Company in Industry . . . . . . . . 8

Structure of the Company . . . . . . . . . . . . . . . . . 10- Business Units Located

at the Territory of Ukraine. . . . . . . . . . . . . . . . . . 12- Subdivisions Having Rights to Open Current

and Settlement Accounts . . . . . . . . . . . . . . . . . . 13- Subsidiary Companies . . . . . . . . . . . . . . . . . . . . . 13- Health Resorts . . . . . . . . . . . . . . . . . . . . . . . . . . . 14- Representative Offices

of Motor Sich JSC . . . . . . . . . . . . . . . . . . . . . . . . 16

Management Bodies of Motor Sich JSC . . . . . 18- The Board of Directors. . . . . . . . . . . . . . . . . . . . . 20- General Meeting of Shareholders. . . . . . . . . . . . 22- Supervisory Board . . . . . . . . . . . . . . . . . . . . . . . . 23- Internal Audit Commission . . . . . . . . . . . . . . . . . 24

Production Activity . . . . . . . . . . . . . . . . . . . . . . . 26- Main Indices of Production

and Financial Activity . . . . . . . . . . . . . . . . . . . . . 28- Production Activity

and Work in progress . . . . . . . . . . . . . . . . . . . . . 29- Labour and Salary . . . . . . . . . . . . . . . . . . . . . . . . 30- Advanced Technologies. . . . . . . . . . . . . . . . . . . . 31 - Certificates and Licences . . . . . . . . . . . . . . . . . . . 32- Service Maintenance . . . . . . . . . . . . . . . . . . . . . . 34- Priority Activities . . . . . . . . . . . . . . . . . . . . . . . . . . 36 - Prospects for 2013 . . . . . . . . . . . . . . . . . . . . . . . 37

Foreign Economic Activity . . . . . . . . . . . . . . . . . 38- Cash Inflow by Regions . . . . . . . . . . . . . . . . . . . . . . . . . 40- Participation in Exhibitions . . . . . . . . . . . . . . . . 40

Financial and Economic Activity . . . . . . . . . . . . 44- Credit Policy of the Company . . . . . . . . . . . . . . . 46- Indices of the Company’s Financial Stability,

Business Activity and Credit Worthiness . . . . . . 47

Investment Activityof the Company . . . . . . . . . . . . . . . . . . . . . . . . . . 48- Capital Investments . . . . . . . . . . . . . . . . . . . . . . . 50- The Company’s Investments

into Legal Entities . . . . . . . . . . . . . . . . . . . . . . . . 50- Attraction of Budgetary Funds and Investments for

Financing the Development and Preproducton of New Kinds of Products in 2012 . . . . . . . . 51

Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52- Analysis of Changes in Cost

of the Company’s Shares . . . . . . . . . . . . . . . . . . 54- Quantity and Structure of Shareholders. . . . . . . 55- Information about Depositary

of the Company’s Shares . . . . . . . . . . . . . . . . . . 55- Information about Custodier

of the Company’s Shares . . . . . . . . . . . . . . . . . . 55

Main Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . 56- Industry Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . 58- Legal Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58- Risks Connected with

Production Activity of Emitter. . . . . . . . . . . . . . . 58- Financial Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Personnel and Personnel Policy. . . . . . . . . . . . . 60- Personnel Structure . . . . . . . . . . . . . . . . . . . . . . . 62- Personnel Development . . . . . . . . . . . . . . . . . . . 62- Prospects of Personnel Policy for 2013 . . . . . . . 63- Youth Policy of the Company . . . . . . . . . . . . . . . 64- Social Sphere . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Financial Statements. . . . . . . . . . . . . . . . . . . . . . 66- Consolidated Balance Sheet . . . . . . . . . . . . . . . . 69- Consolidated Statement

of Financial Performance . . . . . . . . . . . . . . . . . . 70- Consolidated Statement

of Changes in Owner's Equity . . . . . . . . . . . . . . . 71- Consolidation Principles . . . . . . . . . . . . . . . . . . . 72- Main Aspects of Accounting Policy . . . . . . . . . . 72- Notes to Financial Statements . . . . . . . . . . . . . . 74

Dear Shareholders, Colleagues and Partners!

MOTOR SICH

Motor Sich JSC would like to present you its AnnualReport for 2012.Speaking about the Company’s activity in the past yearwe notice with satisfaction that Motor Sich JSC has fin-ished reporting year with positive results. It is provedby financial results of 2012.The Company has no wage arrears. The wages are paidout without delays, according to terms and conditionsof Collective Agreement.Throughout its history Motor Sich JSC adheres to prin-ciples of fair and conscientious business. It allows us tokeep unblemished reputation and gain the trust ofpartners from all over the world.Successful creation of modern production facilitiesand development of new kinds of highly demandedproducts has proved correctness of our strategy.Motor Sich JSC applies advanced means of corporatemanagement in order to increase transparency andavailability of information for shareholders andpotential investors. Like in previous years, the Company pays greatattention to technical upgrading and reconstructionof production facilities, repairing of buildings,

improvement of labour conditions for increasing theoutput of main products.The Company is concerned with personnel policy,solution of social problems of emplyees and theirfamilies, maintaining healthy moral environmentwithin the staff.I would like to express thanks to the Company team,our shareholders and business partners, all thosewho help Motor Sich JSC in its successful activitiesand stable development in pursuit of new goals.

Chairman of the Board of Directors, Motor Sich JSC

V.A. Boguslayev

Basic Informationabout the Company

n Information about the Companyn Information about State Registration of

Motor Sich JSCn Information about Statutory Capital

n Information about Auditorn Specialization of the Company

n Corporate Strategy of the Companyn Mission of the Company

n Positioning of the Company in Industry

MOTOR SICH

BASIC INFORMATION ABOUT THE COMPANY

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MOTOR SICH

Short title: Motor Sich JSCFull title: Motor Sich Joint Stock CompanyEnterprise code: 14307794Legal address: 15 Motorostroiteley Avenue, Zaporozhye 69068, Ukraine

Tel: (38 061) 720-48-14Fax: (38 061) 720-50-00E-mail: [email protected]: www.motorsich.com

INFORMATION ABOUT STATE REGISTRATIONOF MOTOR SICH JSC Place of registration – the Executive Committee of Zaporozhye City Council.Date of state registration – 25.05.1994.

INFORMATION ABOUT STATUTORY CAPITALThe statutory capital of Motor Sich JSC is UAH 280,529,650.00. It is divided into 2,077,990 simple registeredshares issued in book-entry form. Nominal value of each share is UAH 135.

Number of Certificate about registration of shares in book-entry form: 205/1/11

Registration body: the State Commission on Securities and Stock market.

ISIN code assigned to simple registered shares of Motor Sich JSC by the National Depositary of Ukraine: UA 4000143135.

Each simple registered share of Motor Sich JSC provides the same scope of rights to its owner (shareholder).

Motor Sich JSC is the first Ukrainian issuer who has implemented Global Depositary Receipt Program withDeutsche Bank. Deutsche Bank Trust Company Americas is appointed the exclusive custody of Motor Sich globaldepositary receipts (GDR). GDR/shares ratio is 10:1. Motor Sich JSC has taken up obligations to protect the rightsof GDR holders, inform them, granted the right to participate in the Company management and obtain part ofprofit in the form of dividends, guaranteed possibility to convert GDR into shares.

ANNUAL REPORT 2012

Basic Information About the Company 7

INFORMATION ABOUT AUDITORAuthenticity and completeness of financial reports of Motor Sich JSC for 2012 is confirmed by private auditingcompany “ZaporozhAudit. Taxes. Law” (Enterprise Code 13625523) according to Agreement No 2729/09-Д(General Accounting), dated 10.04.2009. Location of auditing company: 8 Tikhy Pereulok Street, Zaporozhye.Date of state registration of private auditing company “ZaporozhAudit. Taxes. Law” – 21.01.1994; Enterprisecode – 1 103 120 0000 012930. Certificate of Auditing Chamber No. 0057, dated 26.01.2001, about regis-tration as an auditing entity. Validity term of Certificate is extended till November 04, 2015.

SPECIALIZATION OF THE COMPANY Development and production of gas turbine engines for military and civil aviation, industrial units for groundapplication (Gas-turbine power plants, Gas pumping units, Combined heat and power plants), modernizationof helicopter equipment.

CORPORATE STRATEGY OF THE COMPANYCorporate strategy of Motor Sich JSC is based on the large-scale diversification of production, strengthening andexpansion of its positions in the market of aviation equipment and its support services, realized in the followingbasic strategic directions:n development and implementation of special programmes on manufacture of competitive products;n expansion of sales and services markets;n improvement of marketing activity;n creation of efficient high-technology production facilities as a result of their technical upgrading;n arrangement of efficient quality management system.

MISSION OF THE COMPANYMotor Sich JSC works to be the best company in the sphere of aviation engine-building.Based on successful 100-year activity of the Company, utilizing our highest intellectual potential, using uniqueadvanced technologies, in close cooperation with our business partners, we make Ukraine an aviation power.

POSITIONING OF THECOMPANY IN INDUSTRY

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MOTOR SICH

Motor Sich JSC is a specialized enterprise, whichbasic products are gas turbine engines for civil andmilitary aircraft, created on their basis industrialgas turbine drives for power and gas-pumping sta-tions, as well as gas turbine power stations andgas-pumping units with these drives. Tens of thousands of engines produced by MotorSich JSC are installed in aircraft of worldwideknown firms: Antonov, Ilyushin, Beriev, Tupolev,Yakovlev, Kamov, Mil, Czech “Aero Vodochody”and Chinese NAMC. They are operated in civiland military aircraft of more than 120 countriesof the world.Many engines of the Company became world lead-ers in their class: AI-25TL turbojet engines are usedin more than three thousand training airplanes andtraining-combat airplanes in 42 countries of theworld; helicopter engines of TV3-117 family areused in 64 countries of the world in all helicoptersof average carrying capacity produced in Russia; D-18 engine are used for “Ruslan” and “Mriya” thatare the highest capacity transport airplanes in theworld; D-136 is the most powerful engine in theworld for Mi-26 helicopters, etc.In order to occupy new market niche, Motor SichJSC is now developing, overhauling and upgradinghelicopters under its own Helicopter EngineeringProgramme.Taking into account achievements of the Companyin helicopter engineering, Vyacheslav Boguslayev,Chairman of the Board of Directors of Motor SichJSC, was given authority of the General Designerfor manufacture and upgrading helicopter equip-ment by Order of the Cabinet of Ministers ofUkraine No. 906-р, dated 14.11.2012.Production Plan of the Company includes industrialpower-generating sets. Motor Sich JSC manufac-tures gas-turbine drives with power of 2.5, 6.3, 8MW, gas-turbine power-generating sets with out-put of 2.5, 6 MW. Except for main aircraft and industrial products,the Company manufactures wide range of con-sumer goods.

Motor Sich JSC is a part of aviation industry complex ofUkraine. Traditionally, it is deeply integrated withenterprises of aviation industry of Russia.

At the present time, Motor Sich JSC performs thefollowing prospective works:

In the sphere of mass production — improvement ofwear characteristics of D-18T engines and their modifi-cations, AI9-3B, TV3-117VMA-SBM1, D-36 enginesof all series, TV3-117V, D-436TP, D-436-148, AI-450-МS families.

There was started mass production of:n AI-222 engines for Yak-130, L-15 and other combattrainers produced in Russia and China;n TV3-117VMA-SBM1V engines designed forupgrading a huge fleet of “Mi” and “Ka” helicoptersall over the world, as well as for installation in newhelicopters; n TV3-117VMA-SBM1V series 4 and 4E enginesdesigned for upgrading Mi-8T helicopters;n small MS-400 engines for unmanned aerial vehicles.

There was developed, prepared to pilot and massproduction:n AI-25TLSh engine, a new modification of AI-25TLengine, for upgrading L-39 training airplanes;n TV3-117VMA-SBM1V series 1 engine with FullAuthority Digital Engine Control (FADEC) andTV3-117VMA-SBM1V series 2 engine withupgraded automatic control system and improvedperformance characteristics for Mi-28, Mi-17 andother helicopters. n MS-14 engine for upgrading An-2 and for installa-tion in new short-range aircraft;n MS-500V turbo-shaft engine for helicopters withtake-off weight from 3.5 to 6 t;n small MS-400H and MS-450 engines for unmannedaerial vehicles;n D-436TP-М engine with thrust reverser for upgrad-ed Bе-200 aircraft;

ANNUAL REPORT 2012

Basic Information About the Company 9

n D-436-148FМ engine for An-178 transport aircraft;n D-27 engine for Аn-70 military transport aircraft;n AI-450М/М1 engines for upgrading Mi-2 helicopter;n AI-9V-1 auxiliary power unit for “Mi” and “Ка” heli-copters;n D-36MB engine for Аn-74 aircraft;

n AI-450S and AI-450S2 for general purpose aircraft;n creation of test benches for development of theengine main units and different special tests;n gas-turbine drives and power generating sets for Russiaand Ukraine, including combined heat and power plantswith gas-steam cycle or cogeneration cycle.

Structure of the Company

n Business Units Locatedat the Territory of Ukraine

n Subdivisions Having Rights to Open Currentand Settlement Accounts

n Subsidiary Companiesn Health Resorts

n Representative Offices of Motor Sich JSC

MOTOR SICH

BUSINESS UNITS LOCATEDAT THE TERRITORY OF UKRAINE

Airline

Aircraft fleet of the Airline:

An-74ТК-200. . . . . . 1An-12B . . . . . . . . . . . 1An-12BК . . . . . . . . . 1An-140 . . . . . . . . . . . 1An-24RV . . . . . . . . . 2Yak-40 . . . . . . . . . . . 2Mi-8 . . . . . . . . . . . . . 1Mi-2 . . . . . . . . . . . . 3

Airline has representative offices in the following citiesand countries:n Kiev – 2 representative offices (Zhyliany andBorispol airports)n Istanbul/Turkey – “CASIO AIR SERVIS” Company

International codes:IАТА code - М9 ICAO code - MSI;Traffic documents code - 011.

Airline performs:а) Regular passenger flights:n Zaporozhye-Borispol-Zaporozhye;n Lugansk-Borispol-Lugansk;n Zaporozhye-Moscow-Zaporozhye (code sharingagreement with “YuTair Ukraine” Airline about jointflight operation)b) passenger and cargo charter flights all over the world.

Tickets for the flights of Motor Sich Airline may bereserved through the following Global DistributionSystems (GDS):

n Amadeusn Galileon TAISn Sirena-Travel.

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MOTOR SICH

ZaporozhyeMachine-Building Plantnamed after V.I. OmelchenkoYear of foundation – 1988.

Areas of activity:n testing of aircraft engines; n assembly and testing of EG-1000 and EG-6000gas-turbine power generating sets; n testing of 6.3, 8, 10 MW D-336, AI-336 gas-tur-bine drives; n testing of D-18T engines;n manufacture of blades; n foundry.

Volochysk Machine-Building Plant (VMZ)Year of foundation – 1971.

Areas of activity:n mass production of parts and metal products foraircraft engines;n production of technological tooling;n overhaul of AI-20 engine and its modifications;n production of EG-1000, PAES-2500 power gener-ating sets;n manufacture and assembly of GTE-MS-2,5; AI-2500Mpower drives;n production of consumer goods with special empha-sis on a wide range of mufflers for motor cars andagricultural equipment.

Snezhnoye Machine-Building Plant (SMZ)Year of foundation – 1970.

Areas of activity:n production of blades for gas-turbine engines;n production of parts and assembly units for miningequipment;n production of consumer goods with special empha-sis on agricultural and utility equipment.

SUBDIVISIONS HAVING RIGHTS TO OPEN CURRENTAND SETTLEMENT ACCOUNTS

The Company has founded the following subsidiariesthat are carrying out their activities at the present time:

Gulaypole Machine-Building Plant17, 9th January Street, Town of Gulaypole, Zaporozhyeregion, Ukraine

Main areas of activity:n development, preparation and organization ofresearch and mass production of machine-buildingproducts;n production, procurement and sales of agriculturalproducts;n provision of services to people on repairing andmaintenance of motor vehicles, as well as delivery ofspare parts for them; n sales of process equipment, cars and tractors with-drawn from process usage.

Gulaypole Mechanical Plant2 Kotovskogo Street, Zheleznodorozhnoye village,Gulaypole district, Zaporozhye region, Ukraine

Main areas of activity:n preparation and organization of research and serialproduction of aircraft engines, aviation equipmentand property;n manufacture of electrical machines, equipment anddevices, industrial products;n manufacture of agricultural machines, process equip-ment for textile industry, agricultural and garden tools;

n production of paint-and-lacquer materials;n production of metal and cardboard containers.

Lebedin Engine-Building Plant 18 Grushevaya Street, Town of Lebedin, Sumy region,Ukraine

Main areas of activity:n development, preparation and organization of pilotand mass production of machine-building products;n sales of manufactured products;n manufacture of industrial products, consumergoods, fuels and oils.

Share of Motor Sich JSC in statutory capital of the abovesubsidiary companies is 100%.

SUBSIDIARY COMPANIES

ANNUAL REPORT 2012

Structure of the Company 13

n Lubny Machine-Tool Plant (Lubny, Poltava region)n Pervomaisk Accessories Plant (Pervomaisk,Lugansk region)n Kiev Accessories Plant (Kiev)n Calibration Center (Zaporozhye)n Construction Management and Social DevelopmentDepartment (Zaporozhye)n Canteen Center (Zaporozhye)

n Company Store “MOTOR SICH” (Zaporozhye)n Medical and Sanitary Department of Motor Sich JSC(Zaporozhye)n Preschool Education Center (Zaporozhye)n Sports Complex (Zaporozhye)n Vinnitsa Aircraft Plant (Vinnitsa)n subsidiary companies

HEALTH RESORTS

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MOTOR SICH

Health Resort “Priboy”

Location: Primorsk, Zaporozhye region (Azov seashore).

Capacity: 7 comfortable buildings for 490 persons.Number of vacationers per year: about 3 thous. persons.Activity: family recreation.

Main advantages: n comfortable rooms;n nutritious food;n equipped beach;n gymnasium;n various leisure facilities;n indoor swimming pool.

Health Resort “Motor”Location: Primorsk, Zaporozhye region (Azov seashore).

Capacity: 4 comfortable buildings for 500 persons Number of vacationers per year: more than 3 thous.persons.Activity: family recreation.

Main advantages: n comfortable, family atmosphere; perfect livingconditions;n the best equipped beach at the Azov seashore;

n tennis courts with special cover;n two thousand meters of sport grounds;n gym;n billiard, cinema and concert halls;n excellent national cuisine;n indoor swimming pool.

Medical-Care Vacation Hotel “Horizont”

Location: Alushta (South coast of the Crimea)

Capacity: 3 dormitory blocks for 500 persons.Number of vacationers per year: more than 4 thous.persons.Specialisation: medical treatment of diseases of respi-ratory organs, functional diseases of nervous system,as well as ear, nose and throat diseases.Activity: family recreation.

Main advantages:n picturesque scenery, clean air, warm sea;n comfortable rooms;n qualified medical service;n balanced diet;n various leisure facilities;n equipped sports and play grounds;n chain of stores and cafes.

ANNUAL REPORT 2012

Structure of the Company 15

Sanatorium “Raduga”

Location: Volochysk

Sanatorium can accomodate 100 resting persons at thesame time.Specialization: treatment of gastrointestinal tractMain advantages:n comfortable rooms;n ancient dendrological park, lake, the Zbruch river;n sporting grounds, “Terrainkur” paths for dosedwalking;n fishing in summer period, sleighing and skiing inwinter period;n gym, library, billiards, evening parties;n Well No. 35 of “Kryshtaleva krynytsa” mineralwater;n two well-rooms with water of different temperature;n skilled medical service.

Sanatorium-preventoriumof Motor Sich JSC

Sanatorium-preventorium of Motor Sich JSC is located30 km from Zaporozhye in picturesque park area onthe bank of the Dnieper river.

Capacity: 6-storey building (with two lifts) for 250personsTime schedule: year-round. Specialization: treatment of locomotor system, periph-eral nervous system, upper respiratory tracts, cardio-vascular system, digestive organs;Main advantages:n comfortable double rooms; n balanced diet;n qualified medical service;n presence of all natural and medical factors that arenecessary for health improvement. n “Terrainkur” paths for dosed walking, sportingground, beach, billiards, sauna;n cinema and concert hall for 300 persons; n There are conducted evening parties - discos, con-certs. There are shown interesting movies.

Besides, sanatorium-preventorium arranges seminars,conferences, trainings, banquets, professional holidays.

USA

Brazil

Ukraine30 Shelkovichnaya Street, Kiev, 01024, UkrainePhone: +38 044 253 9105, +38 044 253 4083,Fax: +38 044 253 9034E-mail: [email protected]: Gennady Alekseyevich Barbinov

Russia14 Novopeschanaya Street, Moscow, 125252, RussiaPhone: +7 495 411 5155, Fax: +7 495 411 5155E-mail: [email protected]://www.motorsich.ruDirector: Petr Ivanovich Kononenko

ChinaRepresentative OfficeAsia Hotel, Office #403, #8 Gongti bei lu, Xinzhong xijie, Doncheng District, Beijing, 100027, ChinaPhone: +8610 65515762, Fax: +8610 65515762E-mail: [email protected]: Oksana Nikolayevna Borukha

U.A.E.Regional OfficePlot F4-02, SAIF Zone, Sharjah, U.A.E.Phone: +9 716 557 8097, Fax: +9 716 557 8098E-mail: [email protected]: Alexander Alexandrovich Lukyanov

AlgeriaRegional Representation81, Lotissement EI Feth, "Les Sables Rouges", El Biar,Algiers, Algeria, 16030Phone: +213 21 92 3720, Fax: +213 21 79 8749E-mail: [email protected]: Nikolai Anatolyevich Suprun

IndiaIndia Liaison Office24 Ferozeshah Rd., New Dehli, 110001, IndiaPhone: +91 114 350 4903, Fax: +91 114 350 4902E-mail: [email protected]: Andrey Yevgenievich Miliukov

Representative officesof Motor Sich JSC

Ukraine

Algeria U.A.E.

IndiaBangladesh

Uganda

China

RussiaBelarus

BangladeshRepresentative Office BS GROUPHouse #199, Road #1, DOHS Mohakhali, Dhaka-1206,BangladeshPhone: +88-02-8715530/8834617Fax: +88-02-8824107E-mail: [email protected], [email protected]: Valery Vasilyevich Tychkov

USA1375, Coney Island Ave., BrooklynNew-York, 11230, USAMobile: +00 134 775 567 84e-mail: [email protected]: Valery Vasilyevich Tychkov

Belarus131 Bogdanovicha Street, Minsk, 220123.Phone: +003 751 73342157Director: Petr Ivanovich Rogazhevsky

BrazilSQS 403, Bloco R, Apt. 306, BrasiliaMobile: +55 61 8328 0212E-mail: [email protected]: Sergey Yuryevich Chernyshev

Uganda13, Gowers St., Entebbe,UgandaPhone: + 256 414-320-794Fax: + 256 414 321-071E-mail: [email protected]: Victor Iosifovich Makukh

Management Bodiesof Motor Sich JSC

n The Board of Directorsn General Meeting of Shareholders

n Supervisory Boardn Internal Audit Commission

MOTOR SICH

Mikhail NaumovichBEREZOVSKY Deputy Chairman of the Boardof Directors, Director ofConstruction and SocialDevelopment of Motor Sich JSC

Vladimir TimofeyevichSHIRKOVDeputy Chairman of the Boardof Directors, MarketingDirector of Motor Sich JSC

Pavel DmitrievichZHEMANYUKDeputy Chairman of theBoard of Directors,Technical Director ofMotor Sich JSC

THE BOARD OF DIRECTORS

Alexander PetrovichNEDASHKOVSKYMember of the Board ofDirectors, Director ofSnezhnoye Machine-BuildingPlant of Motor Sich JSC

Roman SergeyevichGARANENKOMember of the Board ofDirectors, Quality Director ofMotor Sich JSC

Vladimir BorisovichSEMENOV Member of the Board ofDirectors, Director ofCorporate Law andInvestment Projectsof Motor Sich JSC

MOTOR SICH

Olimpy ValerianovichPOKATOVMember of the Board ofDirectors, Director of HumanResources Department ofMotor Sich JSC

Sergei AnatoliyevichVOITENKODeputy Chairman of theBoard of Directors,Production Director ofMotor Sich JSC

Konstantin IvanovichGORBIK Member of the Board ofDirectors, Deputy TechnicalDirector of Tool Production ofMotor Sich JSC

Ruslan AlexandrovichPIDORICHMember of the Board ofDirectors, Head of Youth, Cultureand Public Relations Departmentof Motor Sich JSC

Viktor AlekseyevichLUNINMember of the Board ofDirectors, FinancialDirector of Motor Sich JSC

GENERAL MEETING OF SHAREHOLDERS

22

MOTOR SICH

MANAGEMENT BODIES OF MOTOR SICH JSC:

n General meeting of shareholders (superior body);n Supervisory Board;n Board of Directors (executive body);n Internal Audit Commission.

Management bodies of Motor Sich JSC pay particularattention to honesty, openness, efficiency, responsibil-ity and achievement of the specified objectives.

Authorities and obligations of management bodiesare clearly divided and balanced. Corporate man-agement system of Motor Sich JSC is built accordingto international standards, the best world experi-ence and current legislation of Ukraine. It providesefficient cooperation between management andcontrol bodies, as well as external auditors and allinterested parties (shareholders, contractors, statebodies); monitoring of the Company's activity forachievement of the specified objectives.

COMPETENCE OF GENERAL MEETINGOF SHAREHOLDERS

General meeting of shareholders is the superiormanagement body of Motor Sich JSC. General meet-ing of shareholders may solve all questions related tothe Company’s activity. Questions that are in exclu-sive competence of general meeting of shareholdersare stipulated by current legislation, the Company’sStatute and may not be submitted to other bodies ofthe Company.

CORPORATE MANAGEMENT SYSTEMOF MOTOR SICH JSC

Corporate management of the Company is a system ofrelations between investors (owners of the Company),its managers, and interested parties for provision ofefficient activity of the Company, equal influence ofparties and balance of corporate interests. Corporatemanagement creates system of levers and counterbal-ances for correlation of interests of senior managers,shareholders and other interested parties.

CORPORATE MANAGEMENT SYSTEM OFMOTOR SICH JSC IS BASEDON THE FOLLOWING PRINCIPLES:

n The Company protects rights of shareholders.n The Company provides equal attitude to all share-holders, including minority and foreign shareholders. n The Company acknowledges legal rights of the inter-ested parties and encourages active cooperationbetween the Company and all interested parties forincrease of social wealth, creation of new work placesand achievement of financial stability of the Company. n The Company provides timely disclosure of reliableinformation about all important aspects of theCompany activities, including data about financialstate, results of business activity, structure of share-holders and management.n The Board of Directors provides strategic businessmanagement and efficient control of all managers. Itregularly reports to its shareholders and the Company.

COMPETENCE OF THE BOARDOF DIRECTORS OF MOTOR SICH JSC

The Board of Directors is a permanent executive bodyof the Company that controls its current activities.

The Board of Directors, within its powers stipulated byeffective legislation, Statute and corporate documentsof the Company, makes decisions, concludes agree-ments and acts otherwise on behalf of the Company inorder to achieve the Company’s objectives.

The Board of Directors consists of 12 persons. Term ofpowers is 4 years.

SUPERVISORY BOARD

Anatoly NikolayevichMALYSHChairman of the Supervisory Board,Director of Public Relations ofMotor Sich JSC

Date of birth: 15.04.1956Education: higher

Alexander VyacheslavovichBOGUSLAYEVDeputy Chairman of the SupervisoryBoard of Motor Sich JSC, DeputyDirector of International TechnicalCenter of Motor Sich JSC


Mikhail NikolayevichMOLCHANOVMember of the Supervisory Board,Director of Transport and ProductionAdministration of Motor Sich JSC


Yury MikhailovichGRECHIKHAMember of the Supervisory Board,Assembly fitter of workshop No. 31 ofMotor Sich JSC

Date of birth: 06.07.1954Education: specialized secondary

Petr IvanovichKONONENKOMember of the Supervisory Board,Director of Moscow Representativeoffice of Motor Sich JSC


Valery MikhailovichLOGVIN Member of the Supervisory Board,Director of Catering Center ofMotor Sich JSC


Mikhail IvanovichTRUSHMember of the Supervisory Board,Chairman of Trade UnionCommittee of Motor Sich JSC


Competence of the Supervisory Board of Motor Sich JSC

The Supervisory Board of Motor Sich JSC is a body that protects rights of theCompany’s shareholders and, within its competence stipulated by Laws andStatute, controls and regulates activities of the executive body.

The Supervisory Board consists of 9 persons. Term of powers is 2 years.

Svetlana AlexandrovnaKHOREVAMember of the Supervisory Board,Head of Finance-and-EconomyAdministration of Motor Sich JSC


ANNUAL REPORT 2012

24

Alexander Nikolayevich Polyviany

Chairman of Internal Audit Commission,Deputy Head of Finance-and-EconomyAdministration, Head of Labour and WagesDepartment of Motor Sich JSC


Sergei Nikolayevich Vishnevsky

Member of Internal Audit Commission, Director ofAviation Engine Production, Head of ProductionAdministration of Motor Sich JSC


Liudmila Ivanovna Zavgorodniaya

Member of Internal Audit Commission,Chief Doctor of Medical and SanitaryDepartment of Motor Sich JSC


Andrey Valentinovich Zinchenko

Member of Internal Audit Commission, Head ofPersonnel Administration of Motor Sich JSC


INTERNAL AUDIT COMMISSION

MOTOR SICH

25Management Bodies of Motor Sich JSC

ANNUAL REPORT 2012

Competence of Internal Audit Commission of Motor Sich JSC

Internal Audit Commission carries out internal control and audit of financial and economicactivity of the Company.

Internal Audit Commission consists of 7 persons. Term of powers is 4 years.

Valentin Grigoryevich Pasternak

Member of Internal Audit Commission,Director of Volochysk Machine-BuildingPlant of Motor Sich JSC


Leonid Alekseyevich Pirogov

Member of Internal Audit Commission,Deputy General Designer of Motor Sich JSC


Alexander Mikhailovich Pospelov

Member of Internal Audit Commission,Director of Procurement Administrationof Motor Sich JSC


Production Activity

n Main Indices of Production and Financial Activityn Production Activity and Work in progress

n Labour and Salaryn Advanced Technologies

n Certificates and Licencesn Service Maintenance

n Priority Activitiesn Prospects for 2013

MOTOR SICH

64,219,8

8,36,3 1,4

MAIN ASPECTS OF PRODUCTION ANDFINANCIAL ACTIVITY

20122011201020092008

150

200

250

300

350

400347

100

165

214

258

313

182

243

282

100

50

Income from sold products, works and servicesduring 2008 – 2012 period.

Structure of products sold by Motor Sich JSCin 2012 (%)

Mass-produced aircraft engines

Overhauled aircraft engines

Other aviation equipment

General-purpose products

Consumer goods

Total income from sold products, worksand services:

including aviation equipment

28

MOTOR SICH

n Growth rate of production volume in comparable prices to 2011 – 115.6%;

n Volume of industrial products shipped to the Customers is by 22.9% more than in 2011;

n Specific weight of aviation equipment in the sold products – 92.3%;

n Export share in the income from sold products – 93.1%.

n Profitability of sales – 29.4%

PRODUCTION ACTIVITY ANDWORK IN PROGRESS

ANNUAL REPORT 2012

Production Activity 29

Motor Sich JSC delivered products according to theconcluded contracts in 2012. There were executed276 contracts for the delivery of mass-produced andoverhauled engines, drives, power generating sets.

Specific weight of sold products in 2012 is asfollows:

In addition to production of engines the Company per-formed 98 contracts for the delivery of spare parts (55of them – non-CIS countries, 40 – Aircraft RepairPlants in Russia). In 2012 there were sold consumer goods to theamount of 97.5 mln. UAH.

There were continued works on implementation ofmass-production of several new aviation products inthe course of the year. There were manufactured:

n 4 МS-500V engines;n 2 АI-450М engines;n 4 MS-14 engines;n 2 АI-450S engines;

There were prepared to production and were manufac-tured parts of prototype МS-500UBE, ТV3-117VМА-SBМ2V, D-136-2 engines.

There were performed works related to developmentand introduction into production of the following con-sumer goods:

n There was manufactured pilot batch of “Motor SichMBE-1” hosehold electrical oil mill;

n There was manufactured batch of “Motor Sich MB-8E” walking tractors equipped with electric starter,hood and fenders;

n There was manufactured pilot batch of “MS-470”and “MS-475” petrol-powered saws with improvedtechnical characteristics and new design;

n There was performed upgrading of electrocars intogas-fired motor cars with “МS10P-03” engine;

n There were manufactured upgraded outboardmotors “МS-40E” and “МS-40ED”.

The company has allocated 116.6 million UAH ofown assets into the development and preparation tomass production of new types of aviation products,general technical products and consumer goods. Thisamount will reach 609.3 million UAH, if we take intoaccount expenses for procurement of equipment,manufacture and modification of test benches, per-formance of research and development works.

As of 01.01.2013, the process stock at Motor Sich JSCamounted to 3,207.5 million UAH. During year 2012the process stock increased by 867.9 million UAH(37.1%). Main production process stock increased by827.9 million UAH (36.5%), auxiliary productionprocess stock increased by 40.0 million UAH (57.8%).The reasons for increase of main production processstock were: increase of prices for material resources, cre-ation of process stock for shipments in year 2013, devel-opment and manufacture of prototypes of new products.

Percentage of main products in the process stock:

n As of 01.01.2012 – 97.0%;n As of 01.01.2013 – 96.6%.

Process stock created in 2012 will ensure uninter-rupted and continuous work of the Company inyear 2013.

92,3

6,3 1,4

Aviation equipment

General-purpose technical products

Consumer goods

The Company’s labour remuneration system providesfair remuneration for employees’ labour depending oncomplexity and conditions of work, employee’s profes-sional and business qualities, results of the employee’swork and economic activity of the Company’s corre-sponding subdivision.Motor Sich JSC has introduced new wage rates and offi-cial salaries from July 01, 2012 in order to increasesocial standards for all categories of the Companyemployees pursuant to Law of Ukraine.Increase of average wages from January till December2012 has made 8.6%. Average salary of production and industrial personnelin December 2012 have amounted to 3,731 UAH,industrial workers of main shops – 4,123 UAH, chiefforemen – 5,560 UAH, foremen – 4,136 UAH.Motor Sich JSC occupies 10th place among 40 indus-trial enterprises of Zaporozhye as per salary level.The Company constantly analyzes average salary ofall categories of workers, efficiency rate, labourforce data. Average efficiency rate has made117.2% in year 2012.The Company has no wage arrears, as well as taxarrears to budgetary and extra-budgetary funds.The Company’s labour force has increased by 6% in2012. Labour force structure has changed due to theincreased amount of direct workers from 38.4% as of01.01.2012 to 38.9% as of 01.01.2013.Labour fluctuations has made 0.56% in year 2012.

LABOUR AND SALARY

Qualitative indices of personnel: Structure of production andindustrial personnel by categories, %

1500

2250

3000

3750

750

41,0

19,5

5,1

32,32,1

Industrial workers — 41.0%

Auxiliary workers — 19.5%

Quality control personnel — 5.1%

Engineers and technicians — 32.3%

Other categories — 2.1%

30

MOTOR SICH

20122011201020092008

10 000

15 000

20 000

25 00025 267

21 236 20 832 21 86023 841

23 62819 573 19 248

20 264 22 228

9 6947 042 7 206 7 858 9 024

5000

The Company’s staff on the payroll during 2008 –2012 (persons)

20122011201020092008

3577

1871

27483295

Totalincluding production and industrialpersonnelthereof direct workers and apprentices

of a workerof a production and industrial employee

Growth of average salary of the Companyemployees in 2008 – 2012

2135

18212080

26783212

3488

Manufacture of aircraft engines which should be capa-ble to compete with the products of the leading worldcompanies requires continuous improvement of pro-duction processes with due consideration of the latestachievements of science and engineering.Motor Sich JSC carries out the following activities inthis respect:

Implementation of new production processes:n defect-free single-step braizing of HPT rotor bladesof АI-222 engine;n vacuum brazing of steel tubular heat exchangers;n carbonitriding with controlled carbon potential;n casting of HPT rotor blade parts of АI-222 enginewith redesigned blanks;n casting of IPT spacers of D-18Т engine with modifiedfeeding of cast products;n casting of Fan Turbine rotor blades of D-18Т enginewith usage of ceramic filters;n manufacture of titanium alloy bushings of “78” andАI-450МS engines by means of powder metallurgy;n restoration of magnesium casing of АI-222-25engine by means of gas-dynamic spraying;n restoration of worn-out surfaces by means of gas-thermal spraying;n thermostabilizing annealing of large-size thrustreverser rings of D-436TP engine that are made ofАК4-1 alloy.

Implementation of advanced blanks:n precision investment casting of heat-resistant andstructural alloys;n precision centrifugal investment casting of titanium alloys;n casting of monocrystal blades made of ЖС32, ЖС26heat-resistant alloys; n metal mould casting of magnesium and aluminum alloys;n precise casting of large-size parts made of non-ferrous alloys.

Joint research and development: n with UkrNIIspetsstal Institute on enhancement ofprocess paremeters of hot isostatic pressing ofencapsulants with granules made of ЭП741НП alloyin hot isostatic press QIH 0.9х1.5 for manufacture ofturbine disks;n with Zaporozhye National Technical University oncomplex investigation and development of methods ofrepair of GTE parts made of high-alloyed titaniumcompounds by means of welding using nanostruc-tured additive materials;

n with Kharkov Physics and Technology Institute onenhancement of process paremeters of hot isostaticpressing of high-duty cast products made of titaniumand heat-resistant alloys;n with Research and Development Centre “AdvancedTechnologies” of Electric Welding Institute named afterPaton on development of thermal protective coatingfor blades of АI-450-МS engine.

Information technologies:The Company carries out purposeful works on applica-tion of computer-integrated technologies.Main activities:n development of Computer-Aided Design (CAD)System for designing of aircraft engines, enhancementof its functionality due to special complex calculationand simulation systems.n development of Computer-Aided Process EngineeringSystem;n development of Management Integrated ControlSystem (MICS) on the basis of SAP solutions;n creation and development of Integrated ProductOperation Support System;n system integration of above mentioned systems andformation of integrated data field of the Company; n manufacturing application of CAD\CAM software:Unigraphics, ADEM, MAGMASOFT, IMS-software;n development of control software.

There was imported new process equipment, aswell as components and spare parts to it:n DOOSAN LYNX220LM CNC machining center;n PHOENIX II 275G semiautomatic gear-grindingmachine for Gleason-type conical gears;n OMICRON 1000-ET5 multipurpose circular grindingmachine;n LINEA IRON multipurpose surface-grinding machine;n SARIX SX 200 HPM electrical discharge machine;n AF-36 FLEMING air flow metering system;n BOEHRINGER VDF32M CNC semiautomatic lathe;n TRENS SBL300 CNC semiautomatic lathe.

ADVANCED TECHNOLOGIES

ANNUAL REPORT 2012

31Production Activity

1. Certification of quality management system,production and overhaul

n Extended the term of “Repair Organization Certificate” No. СПР-11untill 12.04.2014;

n Confirmed validity of Quality Management System Compliance Certificate No.ВР 27.1.4223-2011; issued by Certification Center “Gosaviasertifica” (Russia);

n Confirmed validity of Quality System Compliance Certificate No. UA 226244;issued by Bureau Veritas Certification;

n Confirmed validity of Quality System Compliance Certificate No. РОССUA.ИС25.К00031; issued by Certification Center “Quality” (Russia);

n Confirmed validity of Quality System Compliance Certificate No.HTI/130-009/2010; for compliance with requirements of AQAP-2110Standard (NАТО);

n Received Maintenance Organization Certificate No. UA.145.0026; theState Aviation Administration of Ukraine.

2. Type certificates for aviation equipment, ground equipmentand consumer goods2.1. Received:

n Amendment to Type Certificate for АI-450-МS auxiliary power unitNo. СТ260-ВД/Д07, dated 24.04.2012 (AR IAC);

n Amendment to Type Certificate No. СТ 267-АМД/Д05, dated 27.04.2012,for ТV3-117VМА-SBМ1V engine (AR IAC);

n Data Sheet to Type Certificate No. ТД 0035 ver.3, dated 18.01.2012, forextension of ТV3-117VМА-SBМ1V engine service life (the State AviationAdministration of Ukraine);

n Data Sheet to Type Certificate No. ТДД 0009 ver. 05, dated28.08.2012, for extension of АI-450-МS engine service life (theState Aviation Administration of Ukraine);

n Aviation Equipment Developer’s Certificate No. Р-56, dated13.07.2012 (AR IAC);

n Certificate of Conformance No. UA1.050.0241034-12, dated27.12.2012, for “Motor Sich МB-8” walking tractor (INPOMT, Ukraine);

n Type Approval Certificate No. ODC 0550-0209/3.1 for D-336-1/2,D-336-1/2-E, D-336-2Т, D-336-2Т-E, АI-336-2-8, АI-336-2-8-E,GTE-6,3/МS, GTE-6,3/МS-E, GTE-8/МS, GTE-8/МS-E gas turbinedrives, dated 27.06.2012 (“SGS-UKRAINE”);

n Certificate of Conformance No. РОСС UA.ME22.H00299 for MotorSich PAES-2500 gas turbine power generation set and its modifica-tions, dated 03.09.2012 (Kursk, Russia);

n Certificate of Conformance No. POCC UA.ME22.H00300 for MotorSich EG 6000Т-Т10500-3ВНМ1УХЛ1 gas turbine power generationset, dated 03.09.2012 (Kursk, Russia);

MOTOR SICH

32

CERTIFICATES AND LICENCES

n Certificate of Conformance No. C-UA.MХ04.В.00143 for D-336-1/2,D-336-1/2 E, D-336-2Т, D-336-2Т-E, АI-336-2-8, АI-336-2-8-E gasturbine drives, dated 08.08.2012 (Certification Center “Quality”, Russia);

n Expert Advice No. 712, dated 03.04.2012, on conformity of prod-ucts to Unified sanitation-and-epidemiological and hygienic require-ments to goods subject to sanitation-and-epidemiological supervi-sion (Research Center “Health”, Russia);

n Approval No. РРС 00-046664, dated 19.01.2012, for applicationof GTE-6/6,3 М1УХЛ1 gas turbine power generation set (FederalService of Ecological and Atomic Supervision, Russia);

n Data Sheet to Additional Type Certificate No. ДТВ-0003, dated22.08.2012, for Мі-8МSB helicopter.

Licensesn Licence АД No. 041410, dated 02.07.2012, “Rendering of educationalservices by educational institutions”, issued by the Ministry of Education andScience, Youth and Sport of Ukraine;

n Licence АB No. 419865, dated 23.11.2011, “Rendering of preschool edu-cational services”, issued by Department of Education and Science ofZaporozhye Regional State Administration;

n Licence АГ No. 592046, dated 22.12.2011, “Rendering of passenger anddangerous cargo transportation services by motor vehicles”, issued by theMinistry of Transport and Communications of Ukraine;

n Licence АВ No. 472038, dated 23.09.2009, valid from 27.08.2009 untill26.08.2014, “Natural gas supply at uncontrollable tariff”; issued by NationalPower Control Commission of Ukraine;

n Licence АВ No. 583195, dated 20.06.2011, valid untill 27.08.2014,“Rendering of fixed local telephone services”; issued by National PowerControl Commission of Ukraine;

n Licence АГ No. 600416, dated 06.07.2012, “Medical practice”, issued bythe Ministry of Health of Ukraine;

n Licence АВ No. 583195, dated 20.06.2011, “Rendering of fixed localtelephone services”; issued by National Communications ControlCommission of Ukraine.


ANNUAL REPORT 2012

Motor Sich JSC has an after-sales service division(Product Support Department – PSD) that providestechnical support of all manufactured aircraft engineswithin the whole period of their operation. PSD is the main link connecting the Company withnumerous operating organizations.All PSD relations with customers are regulated by theconcluded contracts: at present, more than 346 con-tracts are in force, as well as 274 additional agree-ments to them concerning technical support ofengines, extension of service life, performance of lightoverhaul in service, and other services.

In 2012, Product Support Department:

n has rendered various services to the amount of247.2 mln. UAH;

n has performed light overhaul of 78 engines:thereof in service conditions - 54, at technicalCenters (Technical Center “МSME” in UAE;Technical Center “Borisfen-Avia” in Russia) – 24;

n continued to master new production processesfor light overhaul in service of AI-93B, AI-450-МS,D-436-148, ТV3-117VМА-SBМ1V, VK-2500,D-336-2-8, D-436ТP engines;

n has performed theoretical and practical trainingof 9 groups of foreign specialists in all aspects ofengine maintenance.

The sphere of PSD activity has become wider, as newgas-pumping stations were put into operation in Iran,Turkey, Turkmenia, Uzbekistan, Belarus, Russia,Azerbaijan, Kazakhstan. Total of 115 engines are nowoperated at gas-pumping stations, and 10 engines areoperated at power stations.

Presently, highly experienced specialists of PSDrender in-service support of the following newequipment:

n Аn-148 and An-158 airplanes with D-436-148and AI-450-МS engines of Russia Airlines JSC (St.Petersburg, Russia), Polet Airlines (Voronezh,Russia), VАSО JSC, Aerosvit (Ukraine), UkraineInternational Airlines (Ukraine), Angara Airlines(Irkutsk, Russia), AirKoreya (North Korea), RussiaAirlines (Moscow, Russia);

n Аn-140-100 airplanes with ТV3-117VМА-SBМ1and AI9-3B engines of “Yakutia” Airlines (Russia),“Motor Sich” Airlines (Ukraine), “НЕSA Airlines” and“Police Aviation” Airlines (Iran);

n L-15 airplanes with АI-222К-25 engines in China;

n Мi-2 helicopter with АI-450V engines in Rostov-on-Don;

n K-8J airplanes with AI-25ТLK engine in China,Sudan, Bolivia, Venezuela;

n experimental-industrial operation of Mi-8MSB heli-copters with TV3-117VMA-SBM1V series 4E engines,as well as Mi-8MTV and Mi-24 helicopters with TV3-117VMA-SBM1V engines;

n experimental-industrial operation of 10 MWgas-turbine units in the urban settlement ofNovopskov;

n 7 MW gas-turbine drives at CS “Eskisehir”(Turkey), CS “Volkhov”, CS “Pikaleva”, underground

MOTOR SICH

34

SERVICE MAINTENANCE


ANNUAL REPORT 2012

gas storage station “Kanchurinskaya” (Russia), CS“Yaro Yakhinskoye” (Russia), BCS “Krestishe”(Ukraine);

n 8 MW gas-turbine drives at BCS “Shurtan”,“Zevardy”, “Pamuk” (Uzbekistan), “Western Shatlyk”(Turkmenia), CS “Lozinets” (Bulgaria), CS “Yuzhno-Balykskaya” (Russia), CS “Abshirin”, “Sirjan”,“Hadjiabad”, CS “Proletarskaya”(Ukraine);

n GTE-6.3МS at “Severnaya” heat and power station(Belarus), “Kendyk” heat and power station(Kazakhstan), “Igolskaya” gas-turbine power sta-tion, “NGT-Energiya” (Russia). Installation of 4 GTE-6,3 МS gas-turbine power generating sets atTiamkinskoye field (Russia) and 2 sets at Sarakhsfield (Iran).

Along with aircraft engines and engines of groundapplication, PSD performs warranty repairs of con-sumer goods not only at the Company facilities,but also directly in operating organizations ofUkraine (Vinnitsa, Kirovohrad, Volyn’, Sumy, Kiev,Cherkasy regions), as well as in theCommonwealth of Independent States (Russia,Uzbekistan, Kazakhstan, Belarus).

The Company successfully provides paid services.There were repaired consumer goods to the amount of48.879 thous. UAH in 2012.

MAIN DIRECTIONSOF THE COMPANY ACTIVITY

n development of scientific and technical reserve inorder to provide competitiveness of domesticengines in future;

n development and mastering production of helicopters;

n development of aviation engine modifications forground application;

n high-quality repairs of engines within short periodaccording to flexible contract terms and conditions;

n field service of mass-produced engines, as well asfurther improvement of their characteristics (reliability,service life, cost effectiveness);

n extension and deep integration of relations withRussian aviation engine-building complex;

n expansion of presence at the international marketwith primary orientation to the market of CIS andAsian countries.

For stable and successful development of theCompany under conditions of hard competition in theworld aviation market, it needs to perform constantmonitoring of tendencies in consumer and raw mate-rial markets, and permanent development of therange of goods.

The Company has specified the following main direc-tions of activity:

n major overhaul and modernization of helicopters,including their remotorization;

n development and mastering production of newcompetitive engines with great export potential thatcover demands of Ukraine in aviation products;

n development of engine modifications demandedby the market of aviation products within short timeand with low money expenses for the developmentof new kinds of products;

36

MOTOR SICH

PROSPECTS FOR THE DEVELOPMENT OF NEW EQUIPMENT IN 2013Works on aircraft engines designed by Motor Sich JSC

ANNUAL REPORT 2012

Production Activity 37

Works on МS-14 engine:

n completion of research and development works, andworks on engine certification;

n participation in flight development tests of Аn-2-100aircraft with МS-14 turboprop engine;

n finalizing the engine design documents.

Works on МS-500V engine:

n research and development works, developmentaland special tests on the test bench;

n finalizing the engine design documents;

n manufacture of prototype models.

Works on TV3-117VMA-SBM1V engine:

n flight tests of Mi-24, Mi-8MT/Mi-17, Ка-27, Ка-29and Ка-50 helicopters in cooperation with Mil andKamov Companies;

n works on further extension of the engine service life;

n creation of different modifications of TV3-117VМА-SBМ1V series 1 engine with new electronic automaticcontrol system for engines of Мi-28NM, Мi-171 andКа-52К helicopters;

n creation of modification of TV3-117VМА-SBМ1Vseries 2 engine with upgraded automatic control system;

n research and development works on creation ofTV3-117VМА-SBМ2V engine with increased power.

Creation of МS-500UBE auxiliary power unit.

Works on other aircraft engines:

n modification of D-436TP engines into D-436TP-M version (D-436TP engine with thrust reverser)for performance of flight development tests in Bе-200 aircraft;

n manufacture, bench and flight tests, certificationof TV3-117VMA-SBM1I engine;

n cooperative deliveries of assembly units for AI-222-25 turbofan engines manufactured under theconcluded contracts;

n manufacture of parts and units for AI-222К-25Fengine, testing of prototype engines;

n increasing power-to-weight ratio of АI-9Vengines (creation of АI-9V-1 version)

n preparation to mass production of D-27 engines;

n continuation of joint creation and developmentof AI-450-MS series 1 and AI-450M/M1 engineswith Ivchenko-Progress SE.

Works on ground equipment:

n creation of GTE-8.3/МS gas-turbine drive forEG-8000МS power generating set;

n creation of GTE-МS-2.5D gas-turbine drive withgas-regulating unit produced domestically;

n manufacture of GTE-МS-2.5М gas-turbinedrive with set of attachment parts for upgradingPAES-2500.

Works on helicopter themes:

n certification of Мi-2 helicopter with new navigationand radiocommunication equipment;

n starting up Mi-2МSB helicopter for full-scale testing;

n certification tests of Мi-8МSB(P) helicopter;

n creation of advanced МSB-6 helicopter.

Development of production facilities:

n introduction of advanced technologies for economyof materials, increase of materials utilization rate,reduction of labour-output ratio;

n reconstruction of ТEК-3 with transfer of steamwaste-heat exchanger to water-heating mode;

n mastering repair of new kinds of equipment at Lubnymachine-tool plant;

n introduction of energy-saving technologies, alterna-tive energy sources etc.

Foreign Economic Activity

n Cash Inflow by Regionsn Participation in Exhibitions

MOTOR SICH

Implementation of export contracts concerningaviation and ground equipment is traditionallythe main financial resource. The Company sup-plies new aircraft engines, gas-turbine drives andother ground application products, spare parts,repair-assembling tools, consumer goods. It car-ries out overhauling, aftersale maintenance ofaviation and ground equipment, renders in-oper-ation services.

Export ratio in goods sold is 93.1%.

Export ratio in goods sold during 2008-2012period.

Cash inflow under the concluded contracts hasincreased by 13.2% in 2012 as compared to 2011.Cash inflow from customers in Russia, CIS and non-CIS countries has increased. There was also observedgrowth of cash inflow from Ukrainian customers.

In 2012 main customers were:

n In the Russian Federation: “Russian Helicopters”Holding Company, Klimov JSC, Voronezh AircraftProduction Association, Beriev Taganrog AviationScientific Technical Complex, Rostov HelicopterPlant JSC.

Money was received for the delivery of mass producedaircraft engines: TV3-117 of different versions, D-436-148, AI-450-MS, VK-2500, D-136, D-436TP, TV3-117VMA-SBM1, AI-9V.

n In Ukraine: Antonov SE, Kharkov State AircraftProduction Enterprise, “Ukrainian Helicopters” JSC,Lugansk Aircraft Repair Plant.

Cash inflow has increased by 42.4% as compared to2011. The Company delivered AI-20 series 5, D-436-148, AI-450-МS aircraft engines, gas turbine drives ofAI-20DME family to the internal market, as well asrepaired various modifications of aircraft engines andground equipment.

n In CIS countries: Kazakhstan, Uzbekistan, Belarus,Moldova.

The Company repaired aircraft engines, rendered servicesfor extension of service life, as well as delivered andrepaired ground equipment for CIS countries.

n In non-CIS countries: India, China, Algeria, Iran,Peru, Colombia.

Money was received for the delivery and repair of vari-ous modifications of aircraft engines, as well as for thedelivery of corresponding spare parts.

In 2012 there was opened second stage of Motor SichTechnical Center in UAE. New building of TechnicalCenter will be used for remororization of Мi-8 helicop-ters. It will allow Motor Sich JSC to increase the scopeof rendered services and sales at Middle East andAfrican markets.

The Company paid 30,240.5 thous. US dollars underimport contracts for acquisition, overhaul and refur-bishment of equipment in the accounting year accord-ing to the foreign currency expediture plan.

Germany, Switzerland, USA, Poland, Bulgaria, Korea,Czechia, Slovakia and other countries are main part-ners of Motor Sich JSC in the sphere of importingequipment and spare parts, as well as overhauling andupgrading equipment.

The following machines were purchased: machiningcenters HURON, turning-milling centers DOOSAN,high-vacuum furnaces SECO/WARWICK and TAV,gear-grinding centers Gleason-PFAUTER, turning-milling centers, CNC machines TOSHULIN and otherprocess equipment.

MOTOR SICH

40

20122011201020092008

85

90

95

10093,1

83,8

88,791,5 93,2

80

CASH INFLOWBY REGIONS

There were concluded contracts for purchasing high-vacu-um furnaces SECO/WARWICK, five-axis machining cen-ters, special-purpose grinding machines ESSM 500, otherequipment and components.

Motor Sich JSC persistently implements professionalmarketing policy that makes it possible not only tokeep traditional sales markets of our products, but alsodevelop new ones. The following methods are used bythe Company to organize product sales:

n marketing research of sales markets for determin-ing priorities and implementing merchantable pro-duction projects, as well as sales of aviation andground equipment;

n participation in prestigious specialized exhibitionsrelated to the products manufactured by the Company;

n establishment of regional representative offices indifferent regions of the world: Russia, South-EastAsia, China, India, Middle East, Africa, LatinAmerica. By means of the regional representativeoffices Motor Sich JSC takes part in all tenders fordelivery of the Company products and services con-ducted by the state organizations of different coun-tries, such as: China, India, Thailand, Bangladesh,Sri Lanka, Algeria, the Gulf States, Bulgaria,Hungary, Turkmenistan, Russia etc.;

n establishment of the vast network of service centersall over the world for improving quality and efficiencyof assistance to the Customers of our products;

n task-oriented advertising campaigns aimed at pro-motion of our products in new markets, publicationsin specialized magazines and catalogues.

In 2012, Motor Sich JSC took part in all major interna-tional exhibitions related to the Company’s products:

n exhibitions of aviation equipment – DefExpoIndia(India), “Heli Russia 2012”, “Hydroaviashow”, “Engines-2012” (Russia), “Farnborough International Airshow”(Great Britain), “Airshow China” (China), “DubaiHelishow 2012” (UAE), “ILA Berlin Air Show”(Germany), “Africa Aerospase and Defence 2012”(Republic of South Africa), “AVIASVIT –ХХI” (Ukraine).

n products of ground application were demonstratedat the following exhibitions: “IRAN OIL SHOW 2012”(Iran), “MIOGE-2012” and “Russia Power 2012”(Russia), “Power Gen India @ Central Asia 2012”

41Foreign Economic Activity

ANNUAL REPORT 2012

US dollars

RUR

UAH

Euro

54,536,4

6,3 2,8

Cash inflow for the shipped products and ren-dered services as per payment currency was asfollows:

EXHIBITIONACTIVITY

(India), “OGU 2012” (Uzbekistan), “KIOGE 2012”(Kazakhstan), “Oil and Gas 2012” (Ukraine).

Besides, the Company actively participated in differentexhibitions related to consumer goods, in competi-tions of loggers.

Meetings and negotiations with Operators andCustomers of aircraft engines and ground equip-ment manufactured by Motor Sich JSC were heldduring all events. More than that, at exhibiitons inMoscow, Gelendjik, Gostomel and Dubai was

demonstrated new sphere of Motor Sich activity -Мi-8МSB and МSB-2 helicopters. Advertising andpresentation of advanced products was actively car-ried out during negotiations, in specialized publica-tions and mass media of the countries holding exhi-bitions. Participation in exhibitions and concludedcontracts made it possible to consolidate the resultsachieved by the Company in the development ofsales markets. Motor Sich JSC holds firm positions inthe markets of Russia, South-East Asia, Middle East,countries of Africa and Latin America.

Prospects for 2013

n Strengthening and continuation of cooperation with companies of the Russian Federation (delivery of aircraftengines to the plants of Kazan, Ulan-Ude, Kumertau, St. Petersburg, Beriev Taganrog Aviation Scientific TechnicalComplex, VASO JSC);

n Conclusion of contracts for the delivery of PAES-2500 and EG-6000 power-generating sets to Russia;

n Keeping and expansion of sales markets in non-CIS countries;

n Execution of contracts for the delivery of engines to India, China, Algeria;

n Conclusion of long-term agreements with partners from South-East Asia and Latin America (Bangladesh, SriLanka, Peru, Colombia);

n Continuation of cooperation with Ukrainian customers. Execution of contracts for the delivery of engines;

n Promotion of new kinds of products and services to the market. Remotorization of operating helicopters withnew ТV3-117-SBМ1V engines.

n Participation in international exhibitions and air shows in order to increase turnover and expand sales markets.

MOTOR SICH

42

43Foreign Economic Activity

ANNUAL REPORT 2012

Financial andEconomic Activity

n Credit Policy of the Companyn Indices of the Company’s Financial

Stability, Business Activity and CreditWorthiness

MOTOR SICH

Financial and economic activity of Motor Sich JSC isaimed at provision of financial soundness, stable inflowof financial resources and their efficient usage, rationalbalance between internal and borrowed funds.

During the year, credit funds were used for procure-ment of equipment, replenishment of circulating

funds, payment of salary and other kinds of paymentsrelated to production activities of the Company.

Credit portfolio of Motor Sich JSC at the end of 2012was reduced by 61.7 mln. UAH.

Credit resources share on the liabilities has reducedfrom 4.8% to 3.2% during the reporting period.

MOTOR SICH

46

CREDIT POLICOF THE COMPANY

20122011201020092008

8

12

16

20

3,2

18,1

15,5

8,9

4,8

4

Dynamics of credit resources share on the liabilities in 2008 – 2012 (%)

47Financial and Economic Activity

ANNUAL REPORT 2012

Profitability of sales (index that shows net profit sharein volume of sales) was 29.4% in 2012.

Profitability of current assets (that shows productivityof circulating assets, as well as the profit earned by theunit of circulating capital of the Company) has grownfrom 27.2% up to 32.4%. It positively characterizes

financial activity of the Company.

Return on equity that is determining productivity ofinvestments into the Company has increased up to33.9% in the accounting period. Return on equity ofMotor Sich JSC is at rather high level. It testifies to itsefficient activity.

INDICES OF THE COMPANY’S FINANCIAL STABILITY, BUSINESSACTIVITY AND CREDIT

Investment Activityof the Company

n Capital Investments n The Company’s Investments into Legal Entities

n Attraction of Budgetary Funds and Investmentsfor Financing the Development and Preproduction of

New Kinds of Products in 2012.

MOTOR SICH

MOTOR SICH

50

CAPITAL INVESTMENTS

In 2012, the Company performed works on recon-struction and technical reequipment of the operatingproduction facilities, construction of social facilities,capital and light repair of buildings and structures.764.4 mln. UAH of the Company’s own funds wereallocated for these purposes. Thereof, 427.7 mln.UAH were spent for procurement of equipment formain production facilities.

193 pieces of equipment were distributed amongworkshops during the year:

n High-vacuum furnaces;

n CNC turning machines;

n CNC turning semiautomatic machines;

n Milling machines;

n Electrical discharge machines and other processequipment.

The following works were carried out:

n Construction of foundations for installation of newhigh-technology machining centers;

n Reinforcement of foundation of buiding No.18 byinstallation of piles and anterides;

n Reconstruction of test benches for AI-222-25, AI-222K-25, AI-25, AI-25TL, MS-500UBE, AI-450MSengines;

n Completed construction of Technical Museum;

n Reconstruction of gatehouse with addition of the sec-ond floor over the entrance hall (Structure No. 7а);

n Construction of swimming pool at Health Resort “Priboy”.

There was performed planned scope of capital con-struction of social facilities. All recreation centers, pre-ventoriums and children's health camps were timelyprepared for summer recreational season.

THE COMPANY’SINVESTMENTS INTOLEGAL ENTITIES

As of 01.01.2013, there are 37 companies, more than10% shares of which belong to Motor Sich JSC.

The Emitter owns the shares (equities) of the com-panies located in Ukraine, Russia, Republic ofBelarus. Investments into aviation industry are prior-ity ones for strategic development of the Emitter andfurther investments.

The following investments were made in 2012:

n founded “HELICOPTERS - MOTOR SICH” Ltd.

n purchased controlling share of “Orsha Aircraft RepairPlant” JSC.

20122011201020092008

80

160

240

32

400

Dynamics of equipment procurement for mainproduction facilities in 2008 – 2012.

427,7

56,5

129,7

308,9

330,0

51Investment Activity of the Company

ANNUAL REPORT 2012

ATTRACTION OFBUDGETARY FUNDSAND INVESTMENTS FORFINANCING, DEVELOPMENTAND PREPRODUCTION OFNEW KINDS OF PRODUCTSIN 2012

To reduce the Company’s expenses, the Company’sspecialists:

n have developed “Concept of the State SpecialScientific and Technical Programme on theDevelopment of Aviation Industry of Ukraine for thePeriod Untill 2020” and submitted it to Ministries andAdministrations for coordination.

n have developed draft Law of Ukraine “About StateSupport of Aviation Leasing” and submitted it to corre-sponding Committees of the Supreme Soviet of Ukraine.

n sent enquiries to the Ministry of Finance of Ukraineabout inclusion of funds for implementation of theState Programms on the Development of AviationIndustry of Ukraine, including Research and

Development Works “Development and Introductionof the Latest Design Solutions During Creation ofAdvanced Light Helicopter with Take-off Weight from5 to 6 tons” in the budget of 2013.

n continued participation in the Project of the EuropeanCommission “Efficient Systems and Power Units forSmall Aircraft” (ESPOSA Project). The Company hasperformed all scheduled works. Annual reports underthe Project were submitted to Coordinators, and wereapproved by them.

n performed research and development works“Development and mass production of bypass turbo-fan engine for advanced versions of aircraft” (Stage 1.Code “Е1” for 2012 – “Development of conceptualdesign of bypass turbofan engine with power from6500 to 9000 kgf and performance of design, exper-imental and production research works”) as regardsexperimental and production research works for devel-opment of new production processes and specialequipment for mass production of efficient bypass tur-bofan engine”. Budgetary funds for the performedworks should be received in 2013.

n performed preliminary design for State Kiev DesignBureau “Luch”.

Securities

n Analysis of Changes in Costof the Company’s Shares

n Quantity and Structure of Shareholdersn Information about Depositary

of the Company’s Sharesn Information about Custodier

of the Company’s Shares

MOTOR SICH

MOTOR SICH

54

ANALYSIS OF CHANGES IN COST OF THE COMPANY’S SHARES

In 2012, deals with Motor Sich JSC shares were carried out at FSTS Stock Exchange and the Ukrainian StockExchange, as well as at off-exchange market. Total amount of deals with the Company shares has made about2.35 billion UAH in 2012. Year 2012 was one of the most difficult ones for the world and domestic share markets. According to expertanalyses, Ukrainian share market has lost more than 35% from the beginning of 2012. There were observedessential fluctuations of share prices of Ukrainian emitters in this period. Securities of Motor Sich JSC did notbecome an exception. There was registered minimum price of 1750 UAH and maximum price of 2880 UAH per1 share of Motor Sich JSC.Shares of Motor Sich JSC are among the most liquid securities that are very attractive for investments in Ukraine.They have tangible fundamental growth potential for the near future.

Traditionally, in 2012, shares of Motor Sich JSC were leaders of turnover at the Ukrainian stock exchange. Thescope of deals has reached 2.3 billion UAH. At the stock market there were concluded deals to the amountof 644 mln. UAH. That is more than 20% of all deals.

Price and the scope of deals with Motor Sich shares at the Ukrainian Stock Exchange, UAH.

45004000350030002500200015001000

5000

06

.01

.20

06

06

.04

.20

06

06

.07

.20

06

06

.10

.20

06

06

.01

.20

07

06

.04

.20

07

06

.07

.20

07

06

.10

.20

07

06

.01

.20

08

06

.04

.20

08

06

.07

.20

08

06

.10

.20

08

06

.01

.20

09

06

.04

.20

09

06

.07

.20

09

06

.10

.20

09

06

.01

.20

10

06

.04

.20

10

06

.07

.20

10

06

.10

.20

10

06

.01

.20

11

06

.04

.20

11

06

.07

.20

11

06

.10

.20

11

06

.01

.20

12

06

.04

.20

12

06

.07

.20

12

06

.10

.20

12

Inter-temporal changes of FSTS index and cost of Motor Sich JSC shares

FSTS indexAverage price of deals, UAH

Period Minimum Maximum At the end of period Average dailyscope of deals

2010 1,505 3,040 2,977.8 4,332,7212011 1,609 3,867.9 2,230 13,936,486.82012 1,750 2,880 2,210 2,587,958.8Change 8.76 % -25.54 % - 0.9 % - 81.4 %

55Securities

ANNUAL REPORT 2012

Capitalization (market cost) of Motor Sich JSC as of the end of 2012 has made 5.95 billion UAH.According to forecasts of analysts, Motor Sich shares have significant growth potential in 2013. They are still amongthe most liquid securities that are attractive for investments in Ukraine.

QUANTITY AND STRUCTURE OF SHAREHOLDERS as of 12.02.2013*

The state is not a shareholder of Motor Sich JSC.

DEPOSITARY OF THE COMPANY’S SHARES“All-Ukrainian depositary of securities” Private JSC performs accounting of Motor Sich shares (Enterprisecode: 35917889).Licence for depositary activity as a depositary of securities: series АВ No. 498004 issued by the State Committeeof Securities and Share Market, dated 19.11.2009.Location: 7-g Tropinina Street, Kiev, 04107, UkrainePhone: (044) 585 42 40 (41,42). Site: www.ausd.com.ua

CUSTODIER OF THE COMPANY’S SHARESCustodier, MOTOR-DEALER Ltd. (Enterprise code: 24513000), performs accounting of Motor Sich shares of share-holders, for whom the Company has opened securities accounts on the basis of the Register of Shareholders receivedfrom the registrar in the course of dematerialization. Licence for depositary activity as a custodier of securities: series АВ No. 456918 issued by the State Committee ofSecurities and Share Market, dated 18.02.2009.Location: 21 Omelchenko Street, Zaporozhye, 69068, UkrainePhone: (061) 720 49 85.E-mail: [email protected] Site: www.motor-diler.com.ua

Year Minimum Maximum At the end of period Average dailyscope of deals

2006 275 475 415 246,8022007 430 1,778.36 1,728.8 2,516,0412008 166 1,757 365 1,982,3242009 280 1,810 1,644.52 676,0472010 1,550 3,070 2,967 600,1372011 1,602.16 3,850 2,170 471,968.722012 1,778.5 2,860 2,206.5 39,053.91Change (2012/2011) 11% - 25.7 % 1.7 % - 91.7 %

Price and scope of deals with Motor Sich shares at FSTS Stock Exchange, UAH.

* Date of the last Summary Register of Shareholders of Motor Sich JSC for distribution of invitations to General Meeting.

Owners Q-ty of Q-ty of shares, pcs. Share in Statutory Nominal value ofof shares Shareholders Capital,% securities, UAH.

Legal entities 254 1,642,365 79 221,719,275.00Natural persons 7,061 435,625 21 58,809,375.00Total 2,077,990 100 280,528,650.00

Main Risk Factors

n Industry Risksn Legal Risks

n Risks Connected with Production Activityof Emitter

n Financial Risks

MOTOR SICH

MOTOR SICH

58

INDUSTRY RISKSIndustry risks are connected with small demand forthe Company products at the domestic market ofUkraine, competition with foreign manufacturers,orientation of sales to the Russian market, partialconsumer loss due to decision of Russian airlines toperform aircraft engine overhaul and maintenanceat the Russian aircraft repair plants.

For provision of stable work and increase of profits,the Company pursues consistent marketing policyaimed at search of new customers and diversificationof sales markets.

Motor Sich JSC constantly increases quality and per-formance characteristics of its products, developsnew aircraft engines and their modifications,improves engine in-service support system to holdits positions at the world markets.

LEGAL RISKSLegal risks are connected with adoption of norma-tive legal acts that may change legal basis of theCompany activity.

Motor Sich JSC, as an export-oriented company,deeply feels drawbacks of current legislation, itsinconsistencies and susceptibility to changes thathinder effective foreign economic activity. TheCompany regularly runs into problems during cus-toms clearance of goods (difficult procedure of cus-toms registration, difficulties with timely and com-plete submission of documents), as well as duringobtainment of permits from the State Export ControlAuthorities. To reduce impact of legal risks, MotorSich JSC submits proposals regarding introduction ofamendments in current normative acts in the sphereof export control and customs clearance of goods, aswell as Laws of Ukraine, normative acts of theCabinet of Ministers and different ministries andadministrations that regulate other spheres of theCompany activity.

RISKS CONNECTED WITHPRODUCTION ACTIVITYOF EMITTERRisks connected with production activity of emittermay include personnel risk (lack and loss of qualifiedpersonnel), risk of information leakage, risk of pro-duction accident.

In order to reduce personnel risk, Motor Sich JSCperforms appraisals of engineering and technicalpersonnel, provides professional development ofemplyees, training of future workers of theCompany at higher education establishments.

In order to reduce risk of information leakage, theCompany applied information security system, pro-vided measures to reveal its violations, introducedvideo surveillance system at the Company territoryand security system against unauthorized duplica-tion of information.

To prevent risk of partial or complete suspension ofproduction, Motor Sich JSC carries out activities onprovision of labour safety, improval of labour discipline,performs preventive actions to reveal breakdownequipment and develop labour culture.

FINANCIAL RISKSFinancial risks play a significant role among theCompany risks. Main and most dangerous types offinancial risks are as follows: credit risk, liquidity risk,currency risk and inflation risk.

Credit riskCredit risk is connected with increase of interest rateson credit, as well as demand of preschedule repay-ment of principal debt and interest charges.

The following factors helped to minimize credit risk:

n thorough selection of banks based on the image andstability of financial institution;

59Main Risk Factors

ANNUAL REPORT 2012

n analysis of credit terms and conditions that allowedfor reduction of interest rates under credit agreements,as well as expenses on credit maintenance;

n constant control of the Company’s financial state,its ability and readiness to repay the credit thatallowed for reduction of the Company’s overall cred-it indebtedness.

Inflation riskInflation risk is characterized by possibility ofdepreciation of the real cost of capital (in form offinancial assets of the Company), as well as theexpected profits and income of the Company fromfinancial transactions in conditions of inflation. Thesource of this risk is an external environment inrelation to the Company, id est risk that does notdepend on its activity.

The following methods were used to minimize neg-ative influence of inflation risk upon activity ofMotor Sich JSC:

n timely control of profitability level included in thecost of products;

n gaining real income from financial deals and mainte-nance of credit portfolio in stable convertible curren-cies, such as USA dollar and Euro.

Currency risk Currency risks are connected with adverse changingof currency exchange rate. Foreign economic activi-ty is especially subjected to such risks.

Selection of the most reliable currencies with relativelystable exchange rates as the contract currency is awidespread practice in international trade relations.

Motor Sich JSC is able to protect itself from currencyrisks, as it has a large scope of export and importoperations carried out in one currency. Basic curren-cies of the international contracts of the Companyare USA dollars and Russian Federation roubles.

Besides, basic part of credit resources for the pur-chase of new imported equipment is in foreign cur-rency for minimization of currency risk.

Liquidity riskLiquidity risk is a probability of losses caused byimpossibility to purchase or sell assets in the requiredamount within a short period of time due to worsen-ing of market conditions, probability of deficit offinancial resources or other highly liquid assets forfulfilment of contractual liabilities. Management andminimization of liquidity risk is performed by meansof complex measures aimed at increase of profitsand reduction of expenses.

The following measures helped to minimize liquid-ity risk:

n maintenance of sufficient level of financial resourcesfor financing of production, administrative and invest-ment needs, as well as provision of stable fulfilment offinancial liabilities;

n creation of optimal capital structure;

n complex program on depreciation of accountablemonetary assets;

n planning of the Company budget.

Personnel and Personnel Policy

n Personnel Structuren Personnel Development

n Prospects of Personnel Policy for 2013n Youth Policy of the Company

n Social Sphere

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62

PERSONNEL STRUCTURELabour force at the parent enterprise has increasedby 1762 persons as compared to January 1, 2012.Labour force structure has changed due to theincreased quantity of additionally recruited directworkers. Production and industrial personnel struc-ture is as follows: 41.0% – direct workers, 19.5% –auxiliary workers, 5.1% – quality control personnel,32.3% – engineers and technicians and 2.1 % –other categories.

PERSONNEL DEVELOPMENTIn 2012, the Company has employed 492 young spe-cialists, including 214 young specialists with highereducation, 147 graduates of Zaporozhye AviationCollege, Electrotechnical College and other colleges,and 131 graduates of technical vocational schools.

339 specialists of the Company were advanced inqualification categories according to the results ofextraordinary attestation of engineers and technicians,including 116 young specialists that have worked forless than 3 years.

38 specialists of the Company among the newly-appointed department managers and deputy man-agers were trained at administrative courses conduct-ed by the Academy of National Economy at the gov-ernment of Russian Federation in “Modern Methods ofJoint-Stock Company Management”.

27 employees of the Company have passed competi-tive selection and were sent to Kharkov NationalAerospace University (KhAI) for eductaion in specialty“Airplanes and Helicopters”. Education will take over1.5 years on full-time basis.

17,9

10,9

9,58,7

33,8

19,2Structure of personnel by categories as of January01, 2013, %

Direct workersAuxiliary workersQuality control personnelEngineers and techniciansOther categories

41,032,3

5,1

2,1

19,5

Educational structure of personnel, %

Higher education Specialized secondary education Secondary technical education Secondary education

There are 32 candidates of science among employees ofthe Company.

22,119,2

29,129,6

Age structure of personnel, %

up to 30 years From 51 to 55 yearsFrom 31 to 40 years From 56 to 60 yearsFrom 41 to 50 years Over 60 years

63Personnel and Personnel Policy

ANNUAL REPORT 2012

56 employees of the Company were sent to corre-spondence department of Zaporozhue NationalTechnical University for education at the expense ofstate budget.

It is carried out regular work with young employees ofmilitary age. During military service period, theCompany staff maintains correspondence with them,arranges meetings, reserves workplaces for theiremployment after demobilization. In 2012, 62 demo-bilized young workers were reemployed by theCompany of 86 persons that were called to militaryservice in 2011.

29 workers of the Company have got honorary title“Distinguished engine-builder”. 18 workers have gothonorary title “Master with golden hands”.

PROSPECTS OF PERSONNELPOLICY FOR 2013In 2013, personnel policy of Motor Sich JSC will beaimed at development of management system, provi-sion of trained workers and specialists for implementa-tion of plan for 2013, increased motivation of workersfor more efficient labour.

The Company personnel policy is based on the prin-ciple of continuity of generations. This principle canbe provided only by means of predicted sources ofqualified personnel such as technical vocationalschools and higher educational institutions. MotorSich JSC is the basis for all kinds of practice in work-shops, process and design departments for prepara-tion of student's essays and graduation papers. In2013, it is planned to provide working places for

industrial practice of 700 pupils of technical voca-tional schools of Zaporozhye, 400 college studentsand 600 students of higher educational institutionsof Ukraine.

In 2013, the Company will make the following invest-ments into educational sphere:n Creation of material and technical basis for training inspecialties “Maintenance of aircraft and engines”,“Manufacture of aircraft” in Zaporozhye Aviation College;n Transfer of Mi-2 helicopter, separate assembly unitsand modules, maintenance manual, operating manualof helicopter and other visual aids to ZaporozhyeAviation College;n Creation of the unified educational centre of workersfor machine-building industry of Zaporozhye region onthe basis of “Motorostroitel” Technical College, attrac-tion of budgetary funds for equipment of workshopswith modern CNC machines, training of teaching staff,development of information infrastructure of the edu-cational establishement;n Probation of teaching staff of educational establish-ments at the Company departments;n Obligatory coordination of educational programsenvisioning particular subjects adapted for currentproduction needs;n Training of 150 unemployed persons as turners at“Motorostroitel” Technical College during 3-monthcourses;n Training of students of Zaporozhye AviationCollege in product quality assurance and control ofCNC machines under coordinated programs.One of the basic directions of work with personnelin 2013 is the development of helicopter engineer-ing, namely:

Hired/dehired personnel at Motor Sich JSC during 12 months of year 2012:

Personnel category Hired persons Dehired persons Balance, persons

Direct workers 2,790 1,698 +1,092Auxiliary workers 1,133 760 +373Engineers and technicians,nonproductive personnel 848 575 +273Non-exempt personnel andother categories 200 176 +24

TOTAL 4,971 3,209 +1,762

n annual retraining and professional development of30 workers is specialty “Airplanes and helicopters” atKharkov National Aerospace University (KhAI);n training of 5 helicopter pilots at Krivoi Rog flyingcolledge in specialty “Flight operation of aircraft” atthe Company expense with provision of obligatoryflying practice;n continuous training of graduates of ZaporozhyeAviation College, Zaporozhye Electrotechnical Colledgeat Kharkov National Aerospace University (KhAI) in spe-cialties “Airplanes and helicopters”, “Metrology andinformation-measuring technologies”, “Production ofaircraft engines and power units”;n internship of specialists related with production ofhelicopters at leading aviation enterprises of Ukraine.

For improvement of professional skills of departmentmanagers and deputy managers that were appointedin 2011-2012, it is planned to train them in “ModernMethods of Joint-Stock Company Management” atMoscow Academy of National Economy.

It was decided to certify the Company’s InternationalTechnical Center according to Aviation Rules EASAPart-147 in order to expand the sphere of services inretraining of the customers’ specialists.

Taking into account complete technical reequipment ofthe Company, constant updating of machines, intro-duction of advanced technologies and processingmethods, personnel policy will be aimed at continuousimprovement of professional skills of machine-opera-tors, programmers, technicians and their training inFanuc, Sinumerik (Siemens), West Labs CNC systemsat workshops, as well as at the leading European com-panies-producers of advanced CNC machines.

Motor Sich JSC actively and fruitfully cooperates withthe State Employment Center regarding training,retraining and probation of unemployed persons. In2013, it is planned to arrange training and probationof 50 unemployed persons in demanded professionson the contractual basis.

Special attention is paid to employment of unem-ployed persons under grants of the Employment

Center. 165 persons were employed in 2012. Savingsof salary fund made up 1 mln. 672 thous. 242 UAH.Total, 332 persons were employed. It is planned toemploy 180 unemployed persons in 2013.

YOUTH POLICYIn 2012, Motor Sich JSC carried out the followingactivities under the Company’s Youth policy:

n the V Youth Conference “Youth in aviation: newdecisions and advanced technologies”;

n professional skill competition in 10 specialties;

n competition of wall newspapers “Corporate cultureof departments”;

n familiarization excursions and sports competitionsfor new young employees of the Company;

n military-and-sports competition for persons of mili-tary age;

n participation in regional military-and-sports compe-tition “Recruit -2012”.

n commendation of young workers and specialists ofthe Company with presentation of Certificates:

l “The best young worker” - 30 persons;l “The best young foreman” - 20 persons;l “The best young specialist” - 25 persons.

SOCIAL SPHEREThe Company’s social sphere includes practically alltypes of social benefits: health care, education, recre-ation, sports, housing. Social facilities are financedfrom the Company’s assets.

The Company spent 31.9 mln. UAH for capital invest-ments in the objects of social sphere in 2012. TheCompany is proud of the best local children’s healthand sport camps fully equipped for physical, psychicaland social development of the younger generation.Children are provided with opportunities for individualimprovement, development of artistic skills and activa-tion of their natural potential. 1535 children of the

MOTOR SICH

64

Company’s employees recreated at the camps.Vacation hotel “Horizont” in the Crimea, HealthCenters “Motor” and “Priboy” at the Azov sea areequipped with comfortable dormitory blocks, spacioushalls, cosy rooms (suites and semi-suites), canteenswith three daily meals, bars, saunas, billiard-rooms,cinema halls, libraries, sports grounds and children’splaygrounds.

Motor Sich JSC continues to build new objects of socialsphere. In October 2012, there was opened TechnicalMuseum in Zaporozhye. It is a unique museum for thecity and for Ukraine. There was put into operationsports-and-recreational base “Rovesnik” and openedFame hall in Volochysk (Khmelnitsky region).

Sanatorium-preventorium in Volnoandreyevka villageat the bank of the Dnieper river and sanatorium“Raduga” located in the town of Volochysk(Khmelnitsky region) provide different medical andpreventive services for the resting people: baths,

inhalations, ozokerite therapy, massage, remedialgymnastics, physical and therapeutic procedures.Tourist camp “Meridian” is the most affordable recre-ation site for the Company’s youth for many years. It issituated in one of the most picturesque places,Sedlasty island, not far from Kakhovka artificial lake.Holiday-makers are provided with more than 100 cot-tages, sports ground, tennis tables, billiard-room,rental boats and fascinating youth leasure programs.19352 persons, including 13057 employees of theCompany and their children, recreated at health cen-ters in 2012. There were popular collective arrivals,mother and child arrivals, arrivals of veterans of theGreat Patriotic War and veterans of labour.

1654 persons live at the Company’s dormitories. 519children study at the Center of preschool education.

Collectives of Cultural Center named after T.G. Shevchenkoand “Motor Sich” sports complex are well-known out-side Zaporozhye and Ukraine.

65Personnel and Personnel Policy

ANNUAL REPORT 2012

Financial Statements

n Consolidated Balance Sheetn Consolidated Statement of Financial

Performancen Consolidated Statement of Changes in

Owner's Equityn Consolidation Principles

n Main Aspects of Accounting Policyn Notes to Financial Statements

MOTOR SICH

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68

FINANCIAL STATEMENTSConsolidated financial statements about the results ofthe enterprise activities in 2012 were prepared basedon the International Financial Reporting Standards(IFRS), the International Accounting Standards (IAS)and their interpretation developed by the InternationalFinancial Reporting Interpretations Committee (IFRIC)in edition published at the site of the Ministry ofFinance of Ukraine as of 31.12.2012.

Financial statements are drawn up on the basis ofaccounting records which were kept according to laws

of Ukraine by means of conversion and introduction ofcorrections, as well as reclassification of items forauthentic representation of information according tothe International Financial Reporting Standards.

As the enterprise applies IFRS for the first time, com-ponents of consolidated financial statements do notcontain comparative information for the previous year,except for financial performance characteristics (bal-ance sheet) as of 31.12.2012. Thus, these consolidat-ed financial statements may not be considered a com-plete set of consolidated financial statements accord-ing to the International Financial Reporting Standards.

69Financial Statements

ANNUAL REPORT 2012

31.12.2011 31.12.2012Assets

Intangible assets by residual value 441 312Fixed assets by residual value 3,551,064 4,114,260Long-term financial investments 296,657 299,551Fair value of investment property 29,600 32,368Long-term debit indebtedness 8,246 15,403Other capital assets 166Production stock 3,372,050 4,424,839Commercial debt and other debit indebtedness 1,675,739 1,645,286Monetary resources and their equivalents 371,430 218,230Current financial investments 79,657 657,840Other current assets 46,005 69,298Capital assets and disposal groups 26,936 1,223

Total assets 9,457,825 11,478,776

Liabilities

Cover of deferred charges and payments 877,914 1,070,124Long-term liabilities 297,815 180,000Short-term bank credits 300,327 451,769Current debt against long-term liabilities 29,463 30,266Commercial debt and other credit indebtedness 2,116,081 2,099,449Deferred incomes 214 457

Total liabilities 3,621,814 3,832,065

Registered capital 280,529 280,529

Additionally invested capital 172,731 408,078

Other additional capital 45,496 44 ,144

Reserve capital 70,763 73,934

Retained profits 5,267,008 6,833,325

Withdrawn capital 32,151 27,273

Accumulated exchange differences 1,440 1,742

Total owner’s equity 5,805,816 7,614,479

Minority share 30,195 32,232

Total liabilities 9,457,825 11,478,776

CONSOLIDATED BALANCE SHEET(FINANCIAL PERFORMANCE CHARACTERISTICS) thous. UAH

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CONSOLIDATED STATEMENTOF FINANCIAL PERFORMANCE (thous. UAH)

2012 годIncomes

Net incomes (receipts) from sale of products(goods, works, services) 7,928,376Other operating incomes 5,292,407Shareholding incomes 24,367Financial incomes 22,049Other incomes 27,509

Total incomes 13,294,708

ExpensesCost of sold products (goods, works, services) 4,650,385Administrative expenses 566,479Sales expenses 399,498Other operating expenses 5,321,059Financial expenses 49,743Shareholding losses 7,392Other expenses 46,632 Profit tax 644,993

Total expenses 11,686,181

Minority share 10,942

Net profit 1,619,469

Net profit per one ordinary share (UAH per share) 792.87


ANNUAL REPORT 2012

CONSOLIDATED STATEMENT OF CHANGES IN OWNER’S EQUITY (thous. UAH)

Item Statutoryfund

Additionallyinvestedcapital

Otheradditional

capital

Reservecapital

Retainedprofits

With-drawncapital

Accumu-lated

exchangediffe-rences

Total

Balance as at the beginning of year 280,529 172,731 45,496 70,763 5,259,767 -32,151 1,440 5,798,575

Adjustment:- correctionof mistakes

7,241 7,241

Adjusted balance as at the beginning of year

280,529 172,731 45,496 70,763 5,267,008 -32,151 1,440 5,805,816

Net profit for theaccounting period 1,619,469 1,619,469

Distributionof profit:

Paymentsof dividends -49,981 -49,981

Deductionsfor reserve capital 3,171 -3,171

Withdrawalof capital:

Resale of bought out shares 235,347 4,878 240,225

Other changes -1,352 302 -1,050

Total changes in capital 235,347 -1,352 3,171 1,566,317 4,878 302 1,808,663

Balance as at the end of year 280,529 408,078 44,144 73,934 6,833,325 -27,273 1,742 7,614,479

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Consolidation principles. A subsidiary is an undertaking more than 50% of which voting rights (shares) belong directly or indirectly to theGroup, or the Group has other oppportunity to control its financial or operating policy, and obtain economic ben-efits from that. Subsidiaries are consolidated from the date when the Group gets actual control over them (dateof purchase). Consolidation terminates after the loss of control over these undertakings.

Excess of acquisition cost over fair cost of the Group’s share in the acquired identified net assets is represented asgoodwill. If acquisition cost is less than fair cost of net assets of the acquired subsidiary, then corresponding dif-ference is represented directly in the comprehensive income statement.

Balance of the debt which has originated as a result of intragroup transactions is excluded in the course of con-solidation.

Incomes and expenses of intragroup transactions, as well as unrealized profits and unrealized losses, which canbe reimbursed, will be excluded during preparation of consolidated financial statements for 2013. Comparativeinformation for 2012 will be adjusted as well.

Essential items of financial statements of the subsidiaries which, during preparation of financial statements for2012, applied accounting policy different from accounting policy of the Group, were adjusted according toaccounting policy of the Group.

Minority share of subsidiaries in net assets of these enterprises shall be represented as a separate component ofthe Group’s equity.

Translation of foreign currency. Items represented in financial statements of separate enterprises of the Group are evaluated in corresponding func-tional currency by each enterprise of the Group. Amounts represented in consolidated financial statements are evalu-ated in national currency of Ukraine, hryvnya, which is a functional currency and representing currency for the Group.

Foreign currency transactions are represented by exchange rate of the National Bank of Ukraine (NBU), established atthe date of the transaction. Exchange differences arising as a result of foreign currency transaction shall be included inconsolidated statement of comprehensive income based on the exchange rate effective at the date of the transaction.

Monetary assets and foreign currency liabilities shall be translated in hryvnyas by official rate of the NBU as at theaccounting date. Profits or losses arising as a result of translation of assets and liabilities shall be represented inconsolidated statement of comprehensive income.

Main aspects of accounting policy of Motor Sich JSCThe present accounting policy (further referred to as “accounting policy”) describes accounting basis, standards,rules and procedures applied during accounting and financial reporting by all structural units of Motor Sich JSC,as well as its affiliated companies. Accounting policy determines principles of admission and assessment ofaccounting entities, definition and description of separate items of financial statements of the enterprise, as wellas consolidated financial statements of the group of affiliated companies (further referred to as “Group”).

Management of the Group determines and adopts the policy so that financial statements represented information:

- relevant for decision-making by customers;- fairly representing financial position and performance of the Group (or the enterprise);- reflecting economic sense of events and transactions, and not just their legal form.


ANNUAL REPORT 2012

The purpose of financial statements is to provide such information on the Group and the enterprise financial posi-tion, performance and cash flows that would be useful for making economic decisions by customers.

Application field of accounting policy:The accounting policy is developed for accounting and reporting according to the National Accounting Standards(Regulations), the International Accounting Standards/International Financial Reporting Standards, as well as fortax reporting based on accounting data.

Accounting is performed based on the unified chart of accounts approved by Chief Accountant according to Orderof the Ministry of Finance of Ukraine No. 291, dated 30.11.1999.

Financial reporting under IFRS is drawn up based on information about assets, liabilities, equity, accounting trans-actions and statements of the enterprise performance according to accounting data by conversion of items accord-ing to the International Financial Reporting Standards.

The enterprise uses accounting data for accounting according to tax laws of Ukraine.

The present accounting policy is obligatory for application by all persons involved in formation of the enterpriseassets and liabilities, performance of transactions influencing the enterprise financial state.

Учетные аспекты:The first financial statement of the enterprise based on the International Financial Reporting Standards is drawnup for 2013. Representation and disclosure of information complies with IAS1. Comparative information is rep-resented concerning one previous period – 2012. Notes describe basic corrections of items and their evaluationrequired for conformity with the International Financial Reporting Standards.

Financial reporting elements recognition criteria:

Assets is a resource controlled by the enterprise as a result of past events and from which future economic bene-fits are expected by the enterprise.

Liability is an obligation of the enterprise arising from past events, the settlement of which is expected to result inan outflow from the enterprise resources embodying economic benefits.

Equity is the residual interest in the enterprise assets after deducting all its liabilities.

Income is an increase in economic benefits during the accounting period in the form of inflows or enhancementsof assets or decreases of liabilities that result in increases in equity, other than those relating to contributions fromequity participants.

Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletionsof assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions toequity participants (shareholders).

The elements of financial statements are subject to recognition if they meet the above-mentioned definitions, if itis probable that any future economic benefit associated with them will flow to or from the enterprise; and if theitem's cost or value can be measured with reliability.

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CAPITAL ASSETSFixed assetsCost value of fixed assets is subject to recognition as asset only if:n there is a probability that the enterprise will obtain future economic benefit related to the item; n the item's cost value can be measured with reliability.

The item of fixed assets which can be recognised as asset is subject to evaluation according to the cost value.

All items of fixed assets, which are acquired, obtained or produced by own means, but are not put into operation, arereflected in the accounts of capital construction and fixed assets acquisition (manufacturing). After actual putting intooperation, items or their components which are parts of the starting complex are transferred to the corresponding fixedassets accounts. Before putting into operation, items (components) are recognised as qualifying assets provided that theperiod of their creation exceeds 365 days. In that case, the fixed assets cost value includes financial expenses connect-ed with creation of such qualifying assets according to the National Accounting Standards (Regulations)/theInternational Financial Reporting Standards.

Items of fixed assets which were acquired (built) for the purpose of sale are classified as the goods for resale and areaccounted as per section “Inventories” of the Accounting Policy.

Subsequent expenses which are referring to the item of fixed assets that is recognised already, increase its balance costif it is supposed acquisition of the future economic benefits exceeding originally calculated standard parametres of theexisting item of fixed assets.

Amortisation of fixed assetsAmortisation of fixed assets is calculated by straight-line method according to the useful life determined by techni-cians of the enterprise.

Liquidation value of fixed assets is equal to zero for calculation of amortisation.

Depreciation of the acquired asset is started from the next month after putting the asset into operation.

The land is not depreciated.

The capital assets of little value which are used for the needs of items of social sphere are depreciated 100 % at themoment of their putting into operation.

The capital assets of little value which are used for the needs of primary production are depreciated by productionmethod.

The other capital assets of little value are depreciated 50 % when they are put into operation and 50 % when theyare written-off from balance.

The enterprise stops recognition of the balance value of fixed assets:n after retirement of the asset;n when no future economic benefits are expected from its operation or retirement.

Notes to Financial Statements


ANNUAL REPORT 2012

STRUCTURE AND FLOW OF FIXED ASSETS (thous. UAH)

Item

Buildings,structures,

transmittingequipment

Machinery andequipment

Transportvehicles

Other fixedassets Total

Cost

Balance as of 31.12.11 1,881,778 1,531,619 177,458 874,949 4,465,804

Received per year 263,905 502,769 52,158 189,481 1,008,313

Increases in value 3,704 2,107 83 101 5,995

Retired per year 75,611 19,377 463 20,647 116,098

Balance as of 31.12.12 2,073,776 2,017,118 229,236 1,043,884 5,364,014

Depreciation

Balance as of 31.12.11 110,238 325,494 70,468 408,540 914,740

Accrued per year 86,221 188,269 16,762 92,266 383,518

Increases in value 32 782 20 15 849

Retired per year 12,245 16,719 346 20,043 49,353

Balance as of 31.12.12 184,246 497,826 86,904 480,778 1,249,754

Net book valueas of 31.12.11 1,771,540 1,206,125 106,990 466,409 3,551,064

Net book valueas of 31.12.12 1,889,530 1,519,292 142,332 563,106 4,114,260

As of December 31, 2012: n amount of fixed assets with respect to which exist limitations stipulated by effective legislation regarding the right ofownership is 88,127 thous. UAH;n cost of fixed assets issued as mortgage is 896,163 thous. UAH;n residual cost of fixed assets which are temporarily not in use is 94,380 thous. UAH;n historical (revaluated) cost of fully depreciated fixed assets is 166,010 thous. UAH;n cost of vendible fixed assets is 75,116 thous. UAH;n cost of fixed assets received under operational lease conditions is 161,567 thous. UAH;n depreciation of fixed assets with respect to which exist limitations regarding the right of ownership is 285,028thous. UAH.

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INTANGIBLE ASSETS

The following groups of intangible assets are specified for financial reporting:n Rights;n Trademarks;n Production licences;n Software and software licences;n Other intangible assets.

Item can be recognised as an intangible asset, if such item meets:n definition of intangible asset;n the following recognition criteria:

- there is a probability that the enterprise will obtain the future economic benefits related to the asset;- the asset’s cost value can be measured with reliability.

An intangible asset should be evaluated initially at the cost value of acquisition. All intangible assets that areacquired, obtained or created, but are not put into operation, shall be reflected at the account of capital investmentsinto acquisition (creation) of intangible assets. After the beginning of their actual use, intangible assets are reflect-ed at the account of intangible assets.

The cost of intangible assets created by the enterprise includes all expenses for creation, production and prepara-tion of an asset for usage for its intended purpose.

Amortisation of intangible assets is calculated by straight-line method during their useful life. Liquidation value ofthe intangible assets with restricted useful life is assumed as equal to zero.

INVESTMENTSThe Group possesses corporate rights in other enterprises. For the purpose of financial reporting, investment areclassified as follows:n trade investments;n investments withheld until settlement;n investments in associated companies;n investments in subsidiary companies.

Trade investments are accounted by fair value with reference of its changes to profit or loss of the correspon-ding reporting period.

Investments withheld until settlement and investments with fixed settlement term are accounted by depreci-ated cost value. Investments which do not have fixed settlement term are accounted by their cost value.

Investments in associated companies (the investor has significant influence, but does not control from 20 to50 % of shares) are accounted by equity method. Results, assets and obligations of associated companiesare included in financial statements according to individual share. Balance value of such investments isdecreased when it is recognised reduction of benefit during evaluation of separate investments.

Investments into subsidiary companies (the investor controls more than 50 % of shares) are completely consolidated.


ANNUAL REPORT 2012

INVENTORIESInventories are classified by the following groups:n Basic raw materials, materials, fuel and power stocks;n Auxiliary raw materials, materials and other stocks;n Work in progress;n Spare parts;n Construction materials;n Finished products, semifinished products and the goods for resale.

Recognition of inventoriesn Inventories are reconized by the enterprise if they belong to it and:

- there is a high probability to obtain the future economic profit from their usage;- their cost can be evaluated with reliability.

Transfer of risks and profits connected with possession of inventories is the basis for inventory items inclusion (writ-ing-off) in/from inventories.

The cost value of inventories includes all expenses for acquisition, processing and other expenses incurred to deliv-er inventories to their current location and state.

Method of inventories evaluation during retirement.The enterprise uses the following evaluation methods during retirement of inventories:n Method of weighted average cost;n Method of identified cost.

At use of the weighted average method, the cost of each item is determined as the weighted average of the cost ofsimilar interchangeable items at the beginning of the period and the cost of similar items purchased or producedduring the period.

Method of identified cost provides writing inventories down at the real cost of each unit determined according tothe item of Accounting Policy. This method is used for evaluation of the retirement of inventories in case of trans-actions with accessories, assembly units and parts with nameplate data.

Item Per yearAt the end of year

long-term short-term

Financial investments by method of shareholding in:

Associated enterprises 23,940 286,092

Other financial investments in:

shares and interests in statutory capitalof other enterprises 676

shares 631,029 873 651,276

bonds 11,910 5,954

other financial investments 610

Total 654,969 299,551 657,840

FINANCIAL INVESTMENTS (thous. UAH)

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BALANCE VALUE OF INVENTORIES (thous. UAH)

As of December 31, 2012, balance value of inventories is as follows:n delivered for processing – 106 564 thous. UAH;n registered as mortgage – 256 059 thous. UAH;n presented as commission – 107 thous. UAH.

DEBIT INDEBTEDNESS.Debit indebtedness are the contractual demands shown to buyers and other persons on reception of moneyresources, the goods or services. For the purpose of financial reporting, debit indebtedness is classified as current(obtainment is expected within current year or operational cycle) or as long-term (debit indebtedness which can-not be classified as current one).

Debit indebtedness is classified as commercial debit indebtedness (originating for the goods and services soldduring usual economic activities) and uncommercial (other) debit indebtedness. Initial recognition of debitindebtedness is performed at fair value of the transferred assets. Short-term debit indebtedness is evaluated andreflected at net realisable value in financial reporting.

The enterprise accumulates doubtful debts for reflection of doubtful debit indebtedness. Reserve of doubtfuldebts is accrued based on financial solvency of separate debtors. Debit indebtedness is referred to the doubtfuldebt according to the following criteria:n limitation period of indebtedness expires earlier, than in 12 months from accounting date;n the debtor is absent at the address specified in documents;n the debtor is declared a bankrupt.

Item Balance value as of31.12.2011

Balance value as of31.12.2012

Production stocks 974,952 1,394,635

Animals raising and fattening 338 319

Work in progress 2,165,730 3,020,259

Finished products 221,968 185,632

Goods 5,291 6,882

Total 3,368,279 4,607,727


ANNUAL REPORT 2012

STRUCTURE OF COMMERCIALAND OTHER DEBIT INDEBTEDNESS (thous. UAH)

Item As of 31.12.2011 As of 31.12.2012

Debit indebtedness for products, works and services:

net realisable value 412,875 427,563

Debit indebtedness under settlement:

- of budgetary payments 353,908 315,897

- of advances granted 720,169 705,659

Other current debit indebtedness 188,787 196,167

Long-term debit indebtedness 13,246 15,403

Total 1,688,985 1,660,689

MONETARY ASSETS AND THEIR EQUIVALENTSMonetary assets of the Group include cash in banks, cash on hand, monetary instruments and equivalents ofmonetary assets which are not restricted in use.

At the initial recognition, foreign currency transactions are reflected by translation of the amount in foreign cur-rency into the balance-sheet currency at the rate of the National Bank of Ukraine as at the date of transaction. Theamounts of paid and received advance payments in the foreign currency are translated into the reporting curren-cy with the use of the currency rate as at the date of payment or receipt of advance payment.

Exchange rate differences as per the foreign currency monetary items are determined as at the Balance Sheet date.Exchange rate differences from translation of the Balance Sheet items denominated in the foreign currency arereflected in other operating income and expenses.

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80

LEASELease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership, andmeets one of recognition criteria stipulated by IAS 17 "Lease". All other leases are classified as operating leases.

Assets held for financial lease are recognized as the enterprise assets at the fair value or the discounted cost of theminimum lease payments at the date of receipt. Corresponding indebtedness should be included in the BalanceSheet as obligations on financial lease with separation into long-term and short-term indebtedness.

MONETARY ASSETS (thous. UAH)

Item As of 31.12.2011 As of 31.12.2012

Cash account 349 204

Current accounts in banks 201,480 183,215

Other accounts in banks (letters of credit, cheque-books) 48,401 25,296

Monetary assets in transit 97

Equivalents of monetary assets 97,646 9,418

Total 347,876 218,230


ANNUAL REPORT 2012

PROVISION OF FUTURE EXPENSES AND PAYMENTS (thous. UAH)

Item As of 31.12.2011 As of 31.12.2012

Provision of vacation allowances 8,409 9,803

Provision of future payments for additional pension coverage 264,138 286,177

Provision of future payments for implementation of guarantees 75,634 70,361

Target financing 529,733 703,783

Total 877,914 1,070,124

PROVISION OF FUTURE EXPENSES AND PAYMENTSProvisions are recognised, if the enterprise has legal or actual liabilities as a result of certain event in the past,for settlement of which, with the greater degree of probability, outflow of resources will be required, andwhich can be estimated with sufficient reliability.

The Group recognises provision of vacation allowances as a reserve that is formed monthly based on the salaryfund and estimated rating. Rating is calculated based on data of previous reporting periods taking into accountadjustment for reporting period data. Provision of future payments for implementation of guarantees is also cal-culated based on data of previous reporting periods.

The Group participates in the state pension plan with determined payments that provides for early retirement ofemployees working in harmful and dangerous labour conditions. Obligation reflected in consolidated financialstatements as regard to the pension plan with determined payments shall be determined based on actuary’sreport.

“Target financing” item contains funds in the amount of 682,411 thous. UAH that were released as a result ofincome tax allowance for aircraft-building enterprises, got out of basic activity, as well as out of the enterpriseresearch and development works used for the needs of aircraft-building industry.

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82

EMPLOYEE BENEFITS All employee benefits are accounted as current ones according to IAS 19.

The Group shall pay obligatory payments to the State Pension Fund and the Social Insurance Fund for its employees inthe amount stipulated by Laws. Contribution is calculated as percentage of the current gross amount of salaries, and isincluded in expenses during recognition of corresponding liabilities for payment of the contribution.

USAGE OF STATE SUBSIDIES (thous. UAH)

Item Year 2011 Year 2012

Repayment of bank credits received for purchaseof equipment for technical reequipment of production facilities and modernisation of the enterprise.

27,613 28,444

Payment of interest on credits received for purchaseof fixed assets. 1,894 4,086

Payment of expenses for researchand development works. 6,092 35,608

Payment of expenses connected with increaseof production output. 140,099 480,897

Payment for equipment and works connected withtechnical reequipment and modernisationof production facilities.

115,114 265,405

Total 290,812 814,440


ANNUAL REPORT 2012

PROFIT TAX EXPENSESProfit tax expenses are measured and accounted in financial statements of the enterprise according to IAS 12.

Profit tax expenses reflected in the Statement of financial performance consist of the amounts of current profit tax anddeferred profit tax.

Current profit tax is determined based on taxable profit for the reporting period calculated as per the tax laws of Ukraine.

Deferred tax is recognised in the amount expected to be paid or recovered due to the difference between the BalanceSheet assets and liabilities that are specified in financial statements, and corresponding tax bases of assets and liabilities.Deferred ptofit taxes are calculated based on temporary differences with application of the balance sheet liability method.

Deferred tax assets and liabilities are calculated based on tax rates expected to be applicable in the period when assetsare sold or recovered based on the tax rates acting at the reporting date, or about introduction of which in the nearestfuture it was known reliably at the reporting date.

Item Amount

Current profit tax 735,916

Deferred tax liabilities

As at the beginning of reporting year 199,186

As at the end of reporting year 108,263

Included in Statement of Financial Performance - Total Including: 644,993

current profit tax 735,916

reduction of deferred tax liabilities -90,923

PROFIT TAX (thous. UAH)

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84

RECOGNITION OF LOANS AND OBTAINED CREDITSAll long-term and short-term loans are recognised in the reporting period in which they were obtained.

Expenses on loans are recognised by accrual method – i.e. in the period in which they arised based on contractconditions.

Expenses on loans which are directly connected with acquisition, construction or production of qualifying assetsare capitalised as a part of such assets if the assets recognition criteria are met.

Other expenses on loans are recognised as expenses of the period in which they arised.

LIABILITIES

Liabilities are accounted and recognised by the enterprise according to IAS 37.

Liabilities of the Group are classified as long-term ones (term of repayment is over 12 months) and current ones(term of repayment is up to 12 months).

Long-term liabilities (except for deferred income taxes) are accounted depending on their type or either at amor-tised cost or discounted cost.

Current credit indebtedness is accounted and reflected in the Balance Sheet at initial cost which is equal to fairvalue of obtained assets or services.

The Group transfers part of long-term liabilities into short-term liabilities, when it remains less than 365 days asof the Balance Sheet date until the return of debt portion under conditions of contract.

LONG-TERM LIABILITIES (thous. UAH)

Long-Term Liabilities As of 31.12.2011 As of 31.12.2012

Long-term bank loans 72,721 44,596

Deferred tax liabilities 199,186 108,263

Other long-term liabilities 25,908 27,141

Total 297,815 180,000


ANNUAL REPORT 2012

OWNER'S EQUITYStatutory capital includes cost of property which was obtained by the enterprise as a result of privatisation.

By the end of 2012, the registered statutory capital of Motor Sich JSC is 280,528,650 thous. UAH. It consists of2 077 990 ordinary registered shares with nominal value of 135 UAH.

Motor Sich JSC accrues dividends on shares and recognises them as liabilities at the reporting date only if they aredeclared before and including the reporting date. Accumulated profit is distributed according to procedure estab-lished by the Meeting of Shareholders.

Item As of 31.12.2011 As of 31.12.2012

Issued bills 3,829 4,829

Credit indebtedness for goods, works and services 125,999 196,330

Current obligations under settlement:

- of advances received 1,841,895 1,670,594

- of budgetary payments 25,589 11,178

- of insurance 26,846 32,731

- of salary 45,942 56,329

- with participants 10,044 34,465

Other current liabilities 35,937 92,993

Total: 2,116,081 2,099,449

COMMERCIAL ANDOTHER CREDIT INDEBTEDNESS (thous. UAH)

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86

RECOGNITION OF INCOME AND EXPENSESIncome of the enterprise is recognised on the accrual basis when it is probable that economic benefits willincrease as a result of transaction, and when the revenue can be measured reliably.

Income arising from the sale of goods is recognised when the seller has actually transferred to the buyer signifi-cant risks, benefits and control over assets (the goods are shipped and ownership is transferred), and when allrecognition criteria of the income have been satisfied according to IAS 18.

When the enterprise renders services and performs works under the contract during agreed time, revenue isrecognised in the accounting period in which the services are rendered, and is calculated based on total value ofthe contract or the completed stage. Acceptance Report signed by the both Parties is a documentary evidence thatthe customer has accepted results of performed works and rendered services.

Interest income is recognised in the period which it refers to on the accrual basis.

Dividend income is recognised when the shareholder's right to receive payment is established.

Item Year 2012

Net income from selling products (goods, works, services)

- from production and repairing of aircraft engines 6,437,445

- from production and repairing of ground equipment 435,714

- from production of consumer goods 98,285

- other goods, works, services 956,932

Total sale income 7,928,376

SALE INCOME (thous. UAH)

Item Year 2012

Material costs 2,110,342

Personnel expenses 1,315,594

Depreciation of fixed assets 291,114

Other 933,332

Total cost of sales 4,650,382

COST OF SALES (thous. UAH)


ANNUAL REPORT 2012

Item Year 2012

Personnel expenses: 210,526

- including salary, social costs 181,192

- business travel expenses 15,547

Maintenance cost of fixed assets 46,569

Depreciation of fixed assets 21,558

Labour safety expenses 3,723

Training expenses 15,262

Fire-fighting and security expenses 22,595

Typographic and postal-telegraph expenses 4,925

Other 241,321

Total administration expenses 566,479

ADMINISTRATION EXPENSES (thous. UAH)

Item Year 2012

Transportation, insurance expenses 82,316

Personnel expenses: 9,678

- including salary, social costs 4,959

- business travel expenses 4,719

Warranty service and repair 60,663

Marketing and advertising 46,137

Other 200,704

Total selling expenses 399,498

SELLING EXPENSES (thous. UAH)

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88

Structure of income with respect to ordinary types of activity has not changed since the previous reporting period.Income from the ordinary types of activity, the same as in the previous period, for 90% consists of income from pro-duction and overhaul of aircraft engines, and ground equipment. Income from selling consumer goods is negligible.

The highest figures in items “Other operating income and expenses” belong to the income and expenses relatedto selling of foreign currency and other negotiable assets, as well as maintenance of social sphere facilities.Absolute values of income/expenses have increased significantly in comparison with the previous year.

OTHER INCOME AND EXPENSES (thous. UAH)

Item Income Expenses

Other operating income and expenses

Selling of foreign currency 4,335,795 4,300,293

Expenses for research and development 4,300,293

Operating lease of assets 8,439 331

Operating difference in rates 40,906 27,765

Selling of other circulating assets 165,856 80,176

Penalties, fines and forfeits 531 5,708

Maintenance of housing-and-utilities,social-and-cultural facilities 4,362 4,362

Other operating income and expenses 736,518 715,666

Total 5,292,407 5,321,059

Incomes from shareholding and investment in:

Associated enterprises 24,367 7,392

Other financial income and expenses

Dividends 155

Interest on credit 49,743

Other financial income and expenses 21,894

Total 21,894 49,743

Other income and expenses

Sale of financial investments 7,868 11,309

Non-operating difference in rates 9,848 12,176

Donated assets 33

Debiting of capital assets 1,521

Other income and expenses 9,760 21,626

Total 27,509 46,632

Documents

MOTOR SICH JSC · power-generating sets. Motor Sich JSC manufac-tures gas-turbine drives with power of 2.5, 6.3, 8 MW, gas-turbine power-generating sets with out-put of 2.5, 6 MW